Stick with Ocado despite wild share price swings
OCADO (OCDO) £12.19
Gain to date: 2.7%
Original entry point: Buy at £11.87, 25 July 2019
Our ‘buy’ call on grocery delivery solutions firm Ocado (OCDO) has been tested in recent weeks with the shares demonstrating above-average volatility.
Last month the stock sank 20% in short order due to fears of increasing competition from US firms Amazon and Walmart. Last week it rallied sharply on the news of a multi-year agreement with Aeon, Asia’s largest supermarket group, to open up Japan’s £25bn-plus online grocery market.
The first warehouse should be operational in 2023. Aeon expects to have an annual sales capacity in Japan for online orders of Y200bn or £1.8bn – about the size of Ocado’s existing UK grocery delivery business – by 2025, growing to Y1trn or £9bn in 2035 as younger consumers drive online spending.
Finance director Duncan Tatton-Brown claimed last week that Ocado had ‘no immediate need’ for additional funds, yet this week it announced a £500m convertible bond offering, sending the shares spiralling lower.
Although the terms of the deal are highly favourable, negative sentiment towards the stock – 10% of shares are on loan to short-sellers and more analysts have ‘sell’ recommendations than ‘buys’ – is a fact of life and price volatility is likely to continue.
SHARES SAYS: Investors of a nervous disposition may want to exit but we would top up on weakness as the business grows with more global partners.