As the Boohoo share price stalls, is it a good contrarian buy?

Boohoo (LON: BOO) share price has continued to consolidate this year even as the FTSE 100 and FTSE 250 indices jumped. It has remained between the support and resistance levels at 32p and 42p. All attempts to recover have always found substantial resistance in the past few years.

Boohoo is facing substantial challenges

Boohoo and other fast fashion companies like Asos are going through substantial challenges as competition from the likes of Shein intensifies. They are also struggling as demand for their products rises.

The most recent financial results revealed that its Gross Merchandise Volume (GMV) dripped from over £2.08 billion in FY23 to £1.8 billion in the last financial year. As a result, its revenue tumbled from £1.76 billion to £1.46 billion.

The company’s profits have also narrowed even as it intensifies its cost-cutting initiatives. Its adjusted EBITDA dropped from £63 million to £59 million.

Worse, Boohoo’s net loss widened to over £137 million from about £75 million a year earlier. It now expects that it will return to GMV growth this year, helped by its UK and American business.

Therefore, the stock has crashed as investors remain concerned about its business and whether it will return to growth in the coming years. A key challenge for the company is that competition in the fast-fashion industry is soaring. Shein and Temu, two Chinese companies, have continued to gain market share in key markets.

Still, some positives make Boohoo a good contrarian investment. First, despite its recent woes, its insiders have not sold shares, making him one of the biggest holders. Insider sales is one of the biggest red flags in the stock market.

Second, Mike Ashley, the billionaire founder of Fraser’s Group has accumulated the stock in the past few months. His Fraser’s Group, which owns Sports Direct, Flannels, Amara Living, and Everlast, has become the biggest holder of Boohoo.

As a result, I have a feeling that Ashley will propose acquiring the company to implement a turnaround. Recently, we have seen several big acquisitions in the UK. Daniel Kretinsky is acquiring Royal Mail while Thoma Bravo has bought Darktrace.

BOO chart by TradingView

Boohoo stock price has moved sideways in the past few months. On the daily chart, the stock has moved between the support and resistance levels at 32.75p and 42.5p, It is hovering at the Woodie pivot point and the 50-day and 25-day moving averages.

The stock has formed what looks like a quadruple bottom pattern, signaling that bears are uncomfortable moving below the support at 32.75p. Therefore, Boohoo shares will likely remain in the current range in the coming weeks. More upsides will see it rise to the resistance at 42.54p, which is about 22% above the current level.