Advertisement

Ocado’s surge shows what happens when a hated asset springs a surprise

Shares in online grocer Ocado – hated by investors – suddenly spiked. It shows what can happen when sentiment turns, and holds a lesson for the broader UK market.

190518-ocado
UK OCADO

Yesterday, investors got an object lesson in the dangers of short-selling.

Online grocery logistics specialist Ocado an oft-derided tech company secured a deal with mammoth US grocery chain Kroger.

The share price rose by more than 40% on the day. At one point, it had spiked by 80%.

It just goes to show what can happen when a widely-hated asset starts to get some love.

The highly risky business of shorting stocks

My colleague Dominic Frisby wrote a good piece the other day about why investors should be grateful for short-sellers, investors who make money by betting on a share price falling, rather than rising.

Advertisement - Article continues below

Shorts get a lot of abuse; investors who are "long" a stock tend to hate having its prospects called into question. And often, if a company has become a short-selling target, it's because there are obvious reasons for concern.

The company's business model may be a faith-based, "jam-tomorrow" one; the accounts may be complex and hard to understand. In other words, there's often an element of "if you build it, they will come" (to quote that Field of Dreams film) to these sorts of companies.

Advertisement
Advertisement - Article continues below

No one likes to have their faith questioned. And that's what short-sellers do.

However, being short is risky. If you are long, you can only lose 100% of your stake. That's not nice, but you know the worst-case scenario. If you are short, then your losses are technically unlimited. A share price can just keep going up.

And worse still, the turnaround can happen fast. When that occurs, everyone races to close their short positions in a panic, and the price spikes. And it looks as though that's exactly what happened with Ocado yesterday.

Advertisement - Article continues below

The tech company, once best-known for driving bags of Waitrose shopping around the place, has been one of the most persistently shorted stocks around for years. It was set up in 2000 by a group of former Goldman Sachs bankers. It went public in 2010.

Back then, it was hard to see how it could expand, given its ties to Waitrose. And it also seemed hard to see why anyone would use it, given that other supermarkets had their own online delivery services. One analyst famously said, years ago now: "Ocado starts with an o', ends with an o' and is worth zero."

And yet it turns out that, occasionally, if you build it, they really do come. (It also helps that a backdrop of incredibly low interest rates has created a very forgiving environment against which to run "jam tomorrow" companies, of course.)

Ocado has gradually struck more and more deals over the years, and now this one with Kroger appears to be a game changer. It certainly proves that the concept is not fundamentally flawed, if nothing else.

This asset is hated too but not quite as much as it was a few months ago

Anyway, why are we talking about this today? I'm certainly not going to suggest you take a punt on Ocado, or short the stock either I have a poor record on tech stocks and I haven't been paying much attention to Ocado in recent years, so you'd have to do your own research on that front.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

However, I do think that it's an interesting illustration of just how rapidly things can move when an asset that lots of people hate sees its fortunes change or starts to convince investors that they're wrong.

That seems relevant in the context of the broader British market. We've been pointing out for a while that the monthly fund manager surveys from Bank of America Merrill Lynch (BoAML) have been flagging up just how despised UK assets are. Fund managers have been more "underweight" (ie avoiding British assets), than at any point in the relatively long history of the survey, for a while now.

Yet with the rapid turnaround in the oil price (as my colleague Matthew Partridge pointed out to me the other day, less than a year ago, Brent was still foundering around the $45 a barrel mark), the FTSE 100 has had an injection of enthusiasm. It closed at a record high yesterday.

Advertisement - Article continues below

There is a sense that the Bank of England might not be keen to raise interest rates soon, and a slip in sterling has also helped. But what might also be behind the shift is the sense that the negativity on the UK might be overdone.

The latest BoAML survey showed that global fund managers are starting to warm to UK assets again. In the last couple of months, allocations have jumped rapidly. And yet, there's still a long way to go until Britain is back in the good books or even remotely popular. "The UK remains the consensus short amongst UK fund managers," as the survey puts it.

You don't have to be particularly keen on the UK to make the case for investing. Indeed, MoneyWeek regular Jonathan Compton wrote rather an unimpressed piece on the UK economy in the magazine just a few weeks ago. (If you're not already a subscriber, sign up here).

However, as Jonathan also pointed out the negativity is in the price. You don't need a hated asset to become loved to profit from buying it. You just need it to become a little less hated.

That may be what's happening now.

Advertisement
Advertisement

Recommended

The British equity market is shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Beyond the Brexit talk, the British economy isn’t doing too badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
UK house prices hit a new record high – can it last?
House prices

UK house prices hit a new record high – can it last?

Despite the pandemic, UK house prices have hit a new high. John Stepek looks at what’s driving the surge in prices, and what it means for house prices…
7 Aug 2020
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
7 Aug 2020

Most Popular

Don’t despair on dividends – these companies could be set to bring them back
Income investing

Don’t despair on dividends – these companies could be set to bring them back

The value of dividends paid out by UK stocks has plummeted this year as companies “rebase” their payment policies. But things could soon start to look…
6 Aug 2020
Platinum: the precious metal that looks set to play catch-up with silver and gold
Silver and other precious metals

Platinum: the precious metal that looks set to play catch-up with silver and gold

Gold and silver continue to soar, but there's still time to get in. And there's another precious metal that looks set to go on a bull run too, says Jo…
7 Aug 2020
Eagle Lightweight GT: the reincarnation of the E-type Jag
Toys and gadgets

Eagle Lightweight GT: the reincarnation of the E-type Jag

Jaguar’s classic E-type sports car has been reinvented for the modern age. The result – the Eagle Lightweight GT – is a thing of beauty.
7 Aug 2020