Ive been inventing new investment rules for myself. One is inspired by the number of companies hitting slumps which seem to go on for a lot longer than they used to, and thats to never buy into a recovery stock until after its recovered.
Another Im pondering is never buy a growth stock until after the share price has crashed at least once. That ones partly from seeing Luceco (LSE: LUCE) shares among the biggest risers Monday morning and then, when I looked closer, I saw its an earlier growth darling whose share price had suffered a massive crash.
Rocky road
After flotation in October 2016, things started off swimmingly well for the LED lighting innovator and the share price soared. But a profit warning in December 2017 revealed its outlook had been based on a stock valuation error leading to the financial controllers resignation. Some 3.5m was knocked off guidance for second-half profit and the share price went through the floor.
For the next 12 months, the price continued to slide until it dropped to 75% lower than its flotation level, before 2019 brought the start of a strong recovery. Though 2018 saw a collapse in pre-tax profit, the firm is forecast to come bouncing back this year, putting the shares on a P/E of 15, dropping to 13 in 2020.
My recovery rule counts here too, of course, and Ill at least want to see how this years first-half figures turn out, But I think we could very well be at the start of a sustainable growth phase.
Multiple crashes
Whenever I look at the Boohoo Group (LSE: BOO) share price, my first though is to wonder when the next boom and bust is going to happen. Its not that I dont think its a good company. I do, and I think its been managing its expansion better than market trailblazer ASOS did that bit earlier.
The ASOS share price has soared and crashed massively. Twice. And today, its about the same level it was in late 2012, and 65% down from its peak in early 2018.
Boohoo hasnt been on quite such a dramatic journey. But weve had one big slump since the shares peaked in June 2017, followed by a series of less-dramatic ups and downs and, at 212p, the shares are at a relatively modest loss of 20% from their peak.
Valuation
The big problem for me is I have no clue where the Boohoo share price will be going over the next few years. Now that shouldnt matter at all for a long-term investor, which I am, but its not that simple.
Ive seen many highly-valued companies over the years, ones which I really had no way of valuing at the time I examined them. Some turned out well, saw their earnings rise inexorably and wipe out massive early P/E multiples. But others never quite got there they turned out to be great companies but not great value, and their share prices were still down a decade later.
Thats the key thing theres no company so good its worth buying at any price. Boohoo, on a forward P/E of 43, might justify the optimism. But I just cant work out if its good value, so Im staying away.
