The Week in Review: 13/07/2020

Following the stock markets can be an exciting hobby and a rollercoaster ride of emotions. One minute, a company can be making headlines for record profits and revenue, and the next, it can all come tumbling down. A small news story can disrupt a company's momentum and success, and prove that there is no rose without a thorn. Last week, that is exactly what happened with Boohoo...

More Tears for Boohoo

Boohoo, the online fashion retail company, really is a modern-day rags-to-riches tale. If you're unaware of the story behind the fast-fashion brand and its owners, I implore you to do some research online!

Anyway, since the company went public in 2014, it has grown remarkably. Sales in the last five years have increased from under £200m to over £1.2bn. Likewise, the company is able to put out over 3,000 new lines on its website each week, it owns other popular brands such as PrettyLittleThing and Nasty Gal, and, together with ASOS, is widely regarded as the no.1 place to go for cheap, fashionable clothes for young people.

All was going swimmingly for Boohoo - its share price last week was some 485% higher than in March 2014, and it has built up a fantastic reputation along the way. However, this week, that all came crashing down. Over 50 per cent of Boohoo's clothes are made in the U.K., the majority of them being manufactured in factories in Leicester. As discussed in our Week in Review article a couple of weeks ago, sweatshops and factories in Leicester and the wider area have come under increasing scrutiny recently, due to their poor working conditions. However, a Sunday Times investigation confirmed these suspicions - it reported that the factories that produce Boohoo's clothes were paying workers way below the national minimum wage, and in some cases, just £3.50 per hour. This is more than £5 less than the minimum wage of £8.72 in the country.

With the local lockdown in Leicester being attributed to a rise in Covid-19 infection rates from unsafe, cramped, and poor general working conditions in these factories, the Boohoo story could not have come at a more appropriate time. It highlights the economic inequality within our country, and it is appalling that companies have been getting away with underpaying their staff and factory workers for too long. Similarly, we shouldn't be fooled that Boohoo is a unique case - factory workers are underpaid across the globe, and it is something that needs to be brought to an immediate end.

What does this mean for investors?

Well, initially, the share price has plummeted. On Friday 3rd July, the share was trading at 387.5p, but two weeks later, Boohoo's stock had fallen over 40%. This wiped around £2bn off the value of the company. Many investors will be worried that more dirt will be uncovered, and that the reaction from the company (which claims that it was "shocked and appalled" by the investigation), shows how little it truly knows about its own supply chain. Boohoo is notoriously opaque when it comes to this area (see illustration below), and it will certainly set alarm bells ringing in investors' heads. However, on the contrary, many will hope that this is just a small blip in Boohoo's relatively spectacular rise, and, trading at 41% lower than two weeks ago, the share could see a quick recovery. The fact that executives of the company and the former CEO have been buying shares in the business suggests that they also expect a quick bounce back.

What does this mean for Boohoo?

Boohoo's Co-Founder, former CEO, and newly-appointed executive chairman, Mahmud Kamani, has faced plenty of hardships and obstacles throughout his life. The son of a Kenyan refugee, Kamani came to England in 1968 with next to nothing. Now worth over £1bn, his story is incredibly inspiring. For Kamani and all those associated with Boohoo, this will surely prove to be just another "small bump in Boohoo's spectacular trajectory."

However, in the short-term, things will have to change. The investigation will, in effect, force Boohoo to pay its factory workers higher wages, and if the company is unwilling to do so, there are reports that it will shift a further 40% of its production overseas to Bangladesh and other global hotspots of cheap labour, to keep costs down.

In an era when consumers are increasingly concerned for sustainability, the environment, and ensuring that their clothes and other expenses are ethically sourced, this investigation is a great wake-up call, not just to Boohoo, but to countless firms that operate in a similar, unfair way.

Tesla Takes Off

If you would have invested $100 in Tesla in June 2010, you would now be the delighted holder of $6,482 USD. If you would have put $100 Dollars into a savings account in 2010 and left it, you'd have very little to show for it now.

Tesla is now the most valuable carmaker in the world. Wow! But, I'm not the only one who has been taken aback by the car company's recent spectacular growth. Investors across the world are struggling to understand the forces that are driving Tesla's share price higher and higher. Even CEO, Elon Musk, shared his bemusement by the company's sky-rocketing valuation, on his Twitter account:

The controversial CEO, who hit headlines earlier this year after naming his newborn child X Æ A-Xii, as well as for a variety of other reasons, did not stop there. After Piper Sandler raised their price target for Tesla (the price they forecast the share will be trading at in 12 months time) from $939 to $2,332, Musk could only muster a one-word response online:

What is driving Tesla's dramatic share price rise? In March, Tesla fell to $360. A month ago, it traded at $1,000. Today, it's up at over $1,500, consistently hitting all-time highs along the way. Just last week, Tesla rose to $1,790, before falling again. However, analysts and investors cannot fathom this increase. One reason given is that Tesla beat estimates for Q2. It delivered over 90,000 vehicles in the quarter, which surpassed analyst forecasts of just 72,000. This is all the more impressive when taking into account that the company's main factory in the U.S. was shut for half of the quarter. Nevertheless, while this positive news caused an initial 8% spike in the share price, it does not explain the rest.

Electric cars and vehicles have long been heralded as the future of transport, but very little change has come about. Electric vehicles (EV's) account for less than five per cent of all cars on the road globally. So, are investors being realistic in betting that Tesla will bring this change and drive (excuse the pun) towards a more sustainable future on our roads and highways?

Well, maybe. During the Covid-19 crisis, the share prices of similar EV companies have risen. NIO, a Chinese EV manufacturer, has seen its share rise some 530% since March, and has been dubbed the "Tesla of China." In the last few months, the focus has shifted once again to the topic of ESG and sustainability. Now more than ever, investors are finally seeing that sustainable and environmentally-friendly companies will play a pivotal role in shaping the future, and Tesla is an exciting way to buy into that.

However, for a company that has just 0.8% of the total global automobile market share, surely the valuation increase is unjustified. Many experts believe that it has gone too far, and that the bubble will soon burst, hurting Musk and his noble investors.

Would it be foolish to invest in Tesla now with the belief that the share price could continue to increase? A bullish investor would say probably not - the sky is the limit for Tesla, and even if the valuation is extremely high (and surprising) at the moment, its rise is so detached from fundamentals that it may continue to face little resistance in its upward trajectory.


The Student Investor is not a registered investment, legal or tax advisor or broker/dealer. All opinions expressed by The Student Investor are from the personal research of the author, and are written for educational purposes only. Although best efforts are made to ensure that all information is accurate and up-to-date, occasionally unintended errors and misprints may occur. Please note that the value of your investment can go up or down, and The Student Investor takes no responsibility for any decisions made by readers.