Warren Buffett famously suggested that if we regularly buy burgers, we should want the price to fall rather than rise, so we can get more for our money. Should we think of shares the same way? If the idea is good, the Boohoo (LSE: BOO) share price crash would mean investors rushing to stock up.
Well, there is a weakness in the analogy. We do not hope to one day sell our collection of 20-year-old burgers to raise cash for our retirement. But I think it does hold well for our short-term outlook on share prices. And it’s part of the reason I’ve doubled down on my Boohoo investment. Have I made a sound decision, or have I thrown good money after bad?
When I first invested in Boohoo shares in late 2020, I paid 314p apiece for them. By the beginning of February this year, the Boohoo share price had crashed to around the 100p mark. I’d lost two thirds of my initial investment. Ouch!
Buy, sell, or what?
The question, as always when I’m looking at a losing investment, is what to do next. Well, there’s only one approach for me, and that’s to re-appraise the stock on its current merits. Forget where the share price has been in the past, today’s valuation is the only one that counts.
If I think I’m looking at a lost cause that’s really heading down the plughole, I’ll sell and walk away. If the fall seems justified compared to the company’s long-term potential, but the valuation looks fair to me now, I’ll probably just hold. But if I see the price fall as overdone, I’ll want to buy some more. And so I topped up on 3 February, doubling up on my original investment, paying 102p per share.
Loads more Boohoo shares
I got three times as many shares this time for the same money. It wasn’t an obvious no-brainer buy, though. That’s because the Boohoo share price slump was precipitated by genuine performance weakness.
A warning issued in December hastened the decline. Previous net sales growth guidance of between 20% and 25% for the year ending 28 February 2022 was cut back. The new figure of 12% to 14% is seriously down. What’s going wrong? A lot of it is to do with disruption to international deliveries and cost inflation in the aftermath of the pandemic.
For the three months to 30 November, all international sales fell. Only UK sales rose, by 32%. UK sales do count for more than 60% of the total though, so that helped soften the blow.
Boohoo share price risk in 2022
What’s the risk of my buying now? I suspect economic difficulties will continue for some time yet, and the Boohoo share price could be in for a prolonged weak spell. And we might not see much improvement until international infrastructure is boosted.
On the upside, I think the market currently undervalues the long-term potential of Boohoo. I don’t want to put too much reliance on forecasts at this stage, as we’re still some way from renewed stability. But analysts do seem to be bullish on long-term growth. I’m with them.