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Boohoo’s battles are far from over

Michael Taylor explains why the online clothing retailer’s reputational struggles are creating great trading opportunities
October 21, 2020

I last looked at Boohoo (BOO) in my article ‘Buy the breakout at Boohoo (June 25 2020)', in which I suggested that we should look to trade from the breakout level at its then recent high at 433p. However, the stock didn’t break out from this level. Instead – despite it reporting strong trading in its update – it failed to rally and demonstrated weakness.

I don’t always agree with Efficient Market Hypothesis because I am acutely aware that there are many who know things that are yet to be revealed to the market. How often have we seen stocks sharply rally on volume before catching a bid? Or stocks drifting for a week or two on increased volume before a placing?

In this case Boohoo limped along and wasn’t acting the way a business firing on all cylinders ought to be. Less than two weeks later came the accusation that some of Boohoo’s suppliers had been using labour that paid a minimum wage in Leicester’s sweatshops.

This accusation first appeared in an online blog during market hours on Friday, hence why we see a drop in the price. I’ve marked this drop with the left arrow in Chart 1. Yet the story snowballed and gathered momentum (as these things often do) over the weekend, ready for the stock to gap down and dump hard on Monday morning. 

In just three trading days the stock had halved and tagged 200p. The next day it had rebounded and touched 300p. This was the sort of volatility that one can expect from a runaway Aim stock.

Gradually, the stock stabilised and we saw a move back to around 400p. But then the company gapped up on what seemed like good results (right arrow), yet struggled to rally and hold its gains. The same thing was happening again – the stock was looking weak. And if a stock can’t rally on good results, that is not a good sign.

Only a few weeks later Boohoo announced that PricewaterhouseCoopers would not be participating in Boohoo’s tender process for the company’s audit, with rumours citing reputational concerns. Of course, this is something that didn’t bother PwC when the company audited Tesco, but perhaps it has turned over a new leaf. Regardless, it then broke that four of the top five auditors (Deloitte, KPMG, BDO, and Grant Thornton) had snubbed Boohoo and the stock gapped down even further the following day. However, unlike the prior day the stock was firm in the first hour of trading. This gave me the confidence to come in for a long on a breakout of the daily high at 238p to catch a trend to the auction at 248p.

Intraday auctions are often a turning point for a stock and can take the momentum of a trend out. This is, I believe, what they are designed to do. In the same way trading halts on the American exchanges gives traders a chance to gather their thoughts, intraday auctions give the opportunity for the market to place orders at prices and sizes they’re happy to deal at (knowing this, a trader might be inclined to work out at what price a stock will uncross at and set an order below the trigger point to increase the likelihood of a fill, but perhaps that’s for another article).

As it turned out, I was wrong and the stock carried on until to 265p – a further 17 pence after my uncrossing fill of 248p. But trading is a game of probabilities and playing the highest likelihood over and over.

At the moment, Boohoo is a plaything. Any trader wishing to hold overnight is taking on a big risk as they found when Boohoo gapped down for a second time. Great if they were short – but not so much if they were long. Strong support is likely to come into the stock at 200p (I’ll be setting limit orders of around 193-198p in the stop loss liquidity), but if that doesn’t hold then I feel it would confirm Boohoo is at least in a stage three stock. These are typified by lower highs and selloffs. Referring back to Chart 1, we can clearly see an increase in volume on many down days. It may be a brilliant business but if major auditors don’t want to touch it you must ask yourself why. If something doesn’t seem quite right – as is the case here - well, then there may well just be a reason. Who knows?

Looking at Chart 2 we can see the other online clothing retail market leader Asos (ASC). I’ve marked with an arrow the day the company released its results. Despite its tantalising headline (“Well positioned to progress as one of the few truly global leaders in fashion retail”) the stock has struggled to rally.

This could be because much of the company’s target audience is the younger crowd. And if we’re in lockdown, are people going to be spending on clothes? We’ve seen positive trading in homeware and car dealerships, so this could be a trend in consumer spending coming into play. Another thing to think about: could Aim-traded Sosandar (SOS) make inroads as the company’s target market is the older female demographic? Or should we avoid the sector altogether? It’s something to think about.I don’t hold positions in any of the stocks mentioned, but I feel the story at Boohoo is far from over yet. Keep a close tab on it for daily and intraday opportunities.