Insider Buying

Boohoo share price fall: What does insider transaction and short selling data tell us?

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The share price of fast-growing UK online fashion retailer Boohoo – which owns a number of popular fashion brands including Boohoo, PrettyLittleThing, and Nasty Gal – has been very volatile in 2020.

In May, Boohoo (BOO:LN) shares came under pressure from a short attack from ShadowFall Research. The short-seller accused the online fashion company of exaggerating its free cash flow by over £30 million.

Then, in July, Boohoo’s share price fell sharply after The Sunday Times published an article highlighting poor working conditions at a clothing factory in Leicester linked to Boohoo. This resulted in the company launching an independent investigation into its supply chain.

More recently, Boohoo’s share price fell around 20% on 19 October after the company announced that its auditor, PricewaterhouseCoopers (PwC), will be stepping down as auditor. Some investors see this as a red flag.

Clearly, there has been a lot of news surrounding the company in 2020 and some of it has been slightly concerning.

Should Boohoo investors be worried? Is there further downside on the cards?

Let’s take a look at the insider transaction and short selling data to see if this provides any valuable insights. This kind of data can help investors cut through the noise.

Boohoo: insider buying

Looking at insider transaction activity, it’s interesting to see that since the news that PwC is set to step down as auditor, and the subsequent share price fall, three top-level insiders at Boohoo have purchased Boohoo shares.

BOO-LN2    Source: 2iQ Research

Our records show that on 20 October:

  • Founder and Executive Chairman Mahmud Kamani purchased 300,000 shares at a price of £2.43 per share
  • CFO Neil Catto bought 5,825 shares at a price of £2.57 per share
  • Deputy Chairman Brian Small acquired 10,000 shares at a price of £2.50 per share 
What we have here is a nice little ‘cluster buying’ pattern. This is a positive development as it shows that multiple insiders are confident about the future and expect the share price to rise.

While Kamani’s purchase was the largest by far in nominal terms (£729,000), Small’s purchase was the largest in relative terms. His purchase of 10,000 shares increased the size of his holding by 21%.

BOOHOO11     Source: Bloomberg

Insider IQ

It’s worth highlighting the fact that in the recent past, insiders at Boohoo have timed their purchases well.

In mid-July, three insiders, including Kamani and Non-Executive Director Iain McDonald – who was previously a top-ranked retail and e-commerce analyst at a UK investment bank – went long when the share price was under pressure and near the £2 level. We highlighted this insider buying activity in an article here. In the next two-and-a-half months, the stock rose around 75%.

It’s also worth highlighting the fact that Kamani has a very high trading IQ. His 2iQ short-term trading IQ is 118, while his 2iQ long-term trading IQ is 120. This tells us that he has a very good track record when it comes to timing his purchases and sales. 

Untitled2256                                         Source: 2iQ Research

Overall, we see this insider transaction activity as bullish. It indicates that insiders believe the growth story at Boohoo remains intact.

Short interest

Turning to the short interest data, our records show that at present, 24,076,596 shares are on loan. Boohoo has a total of 1,261,276,479 shares issued which means that short interest is 1.91%.

2iQ Alpha BOO1    Source: 2iQ Research, Astec Analytics

Our data shows that currently, three institutions have short positions over 0.50%. These are:

  • Lansdowne Partners (0.70%)
  • PSquared Asset Management (0.55%)
  • Odey Asset Management (0.50%)

Overall, this level of shorting does not look too concerning, in our view. Short interest of 1.91% is relatively low. To put that figure in perspective, cinema operator Cineworld Group, which is one of the most shorted stocks on the London Stock Exchange, currently has short interest of about 15%.

The data tells us that hedge funds are not betting heavily against Boohoo shares.

Strong financial results

Finally, it’s worth looking at Boohoo’s recent financial performance, to provide a little more context to the data above.

Boohoo’s half-year results, posted on 30 September, were very good. For the period:

  • Revenue was up 45% to £816.5 million
  • Profit before tax was up 51% to £68.1 million
  • Adjusted diluted earnings per share (EPS) were up 56% to 4.53p
  • Net cash was up 67% to £345m

The company also increased its revenue growth forecast from 25% to 28% to 32%.

“The group has continued to gain market share in all key markets and we remain optimistic about the group's prospects with the belief that it is well-positioned to continue making progress towards leading the fashion e-commerce market globally," said CEO John Lyttle.

Overall, these were very strong results. They indicate that Boohoo has a lot of momentum right now.

Can Boohoo’s share price recover?

On balance, the data on Boohoo is quite bullish.

Multiple insiders have purchased stock recently in a cluster buying pattern, which is a strong positive signal. This buying activity suggests they expect the share price to rebound. Meanwhile, short interest remains low.

Putting this all together, the data suggests that the stock could be undervalued at present.