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Boohoo, We Should Go Long With Citadel, Short With The Market?

Trade Boohoo Shares Your Capital Is At Risk
Updated 16 Sep 2022

Key points:

  • Citadel has upped its Boohoo stake to 5.33%
  • BOO is also London’s most shorted stock
  • So, who is right, Citadel or the market?

Boohoo (LON: BOO) shares have not done well recently, this we know. In fact, BOO is down some 84% over the past year from highs of around the £2.50 mark to today’s 40 pence or so. The big question though is what happens next? We must, after all, be wary of the sunk cost fallacy, the only thing that matters is how do we make a profit from here, not what happened in that past.

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At which point we’ve some more information. Citadel (the investment house run by Ken Griffin) has added to its position in Boohoo shares. It’s not a huge change, 0.4% of the outstanding equity or so, but it is a notifiable one. It’s also not into the stock itself, but in swaps. The reason for the notification is that it takes the overall position up to 5.33%.

That Citadel has bought in some more is not proof positive of anything. They are not correct every time after all, their performance over time is a matter of being right more often than not, not of being right every time. But as we pointed out a couple of days ago Boohoo is London’s most shorted stock. So there’s a clear conflict of opinion here and we might want to decide which side of that discussion we’re on. That is, should we be short in some manner, long with Citadel or simply out because we don’t know?

Boohoo share price
Boohoo share price from IG

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Of course, even if Boohoo is London’s most shorted stock that doesn’t mean that the market as a whole is short BOO. The short position is, as far as we know, 8.6% of the share issuance, and rather larger than that of the free float. But still, there’s a difference of opinion here, which side are we on?

The bear argument is that Boohoo is suffering from structural problems. Perhaps the loss of the local production base over those minimum wage problems kills the business model. For buying in from further away will certainly lengthen lead times. Possibly those logistics problems in the US aren’t solvable. Maybe just what was the fashionable outlet among the youths is no longer that and sales will fall?

The bull argument is that these fears are all overdone. As we noted last time, Boohoo has faced stock market concerns before, at least twice, and bounced back from them. It’s taking longer this time but perhaps it will again? That is, Boohoo is facing cyclical problems, not structural ones. So, we can imagine sales and margins expanding again and thus the BOO share price to rise.

We would want to position ourselves on whatever side of that argument we wish before either of those things happened of course. The Citadel news is not proof of either contention. For the obvious reason that no investor is right all the time. But it does show that there are some who at least who believe the cyclical explanation. Which one do we think is correct?