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Short of the Week: Ocado


So what’s the problem with Ocado? Given the recent headlines about the company, you might think this was a buy, or at the very least a hold, and many would agree with you. On 31 January the food delivery specialist saw its share price spring 8% as its full year profits beat expectations. The company reported a 13.6% rise in gross retail sales and that it was extending its technology and warehousing agreement with supermarket Morrisons, which contributed £99.4 million in revenue last year.

But look at the short interest on Ocado and it is a very different story. There are large short positions held against Ocado in the fund management community, notably led by Discovery Capital Management. The fund manager holds short positions in a number of supermarkets, including Sainsbury, WM Morrison and Marks & Spencer. But it is not alone in its pessimism: GMT Capital is also very bearish on Ocado, although it has slightly trimmed its position since November.

Other Ocado bears include UBS Asset Management and hedge fund giant Marshall Wace. Total net short positions in Ocado stock on 16 February stood at just over 17%, close to the high of more than 20% in June.

Last time fund managers were this bearish about Ocado, it was May 2013.

Fund managers are obviously bearish because of Brexit – its impact on sterling and the knock-on impact on the UK supermarket and food retailing sectors is obvious. When Britons went to the polls to vote in favour of Brexit in June, the likely slap to sterling was probably not high on their agendas, nor the inevitable consequences of higher prices for imported food. It looks as if inflation will start to pick up in the UK in 2017, and this is beginning to burn itself into consumers’ pockets.

Any visit to a UK supermarket will reveal how food prices are beginning to pick up. Currency weakness takes a little while to feed its way into consumer prices, but it is safe to say we are beginning to see this bite. Even Ocado has admitted that the average spend per delivery has dropped, demonstrating that consumers are getting more careful about their household grocery spend – no more luxuries, in other words.

Ocado’s share price hit an historical high in July 2015, when it traded at around the 450-453 mark. Since then it has bounced off a number of progressive lows, including 246.30 on 12 December, and 238.50 on 2 February, right after the so-called positive results from last year.

But what fund managers are concerned about here is not Ocado’s past, but its future. Ocado is talking about investing more in technology to improve the efficiency of its delivery and warehouse management systems. Tim Steiner, the company’s CEO, said he hoped to be able to increase the capacity of existing facilities by over 20,000 weekly orders.

Since the beginning of the year, a number of brokers have issued sell recommendations, among them HSBC, which is talking very bearishly about a target price of 200 for Ocado. Numis has bucked the trend, rating Ocado a buy and slapping an ambitious target price of 400 on the stock. One of these two is going to be wrong, and we’d be cautious about betting against the likes of Marshall Wace, with its kill or be killed culture.

Investors desperately want Ocado to win a contract with an overseas supermarket to match the one it enjoys with Morrisons, and certainly Steiner has said the company is in talks with a number of vendors in unspecified “overseas territories”. However, the clock is ticking, and if he is going to pull that particular rabbit out of the hat, he had better do it soon, before the anticipated inflation and consumer cut backs start to damage its earnings.

For short traders, using financial spread bets or CFDs to short Ocado, there will be more focus on what happens in the next 1-3 months. The next date for your diary is 14 March, when Ocado issues its Q1 trading statement. It should make interesting reading.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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