Short-sellers start nibbling away at Ocado again even as firm delivers solid trading update

Russ Mould
17 September 2018

“The battle lines are still drawn between those who see Ocado as an online grocer that will struggle to ever earn enough profit or generate enough cash to justify its £6 billion-plus market capitalisation and those who see it as a technology company, licensing out its logistics expertise to firms that wish to improve their own online offering,” says Russ Mould, investment director at AJ Bell.

“The bulls have won the argument hands down over the past year, since Ocado’s shares have surged from 305p to 946p, helped by licensing deals in France, Sweden, Canada and America. Those wins helped to create a huge short squeeze in the shares, as bears felt obliged to buy back the stock they had borrowed and sold and return them to their original owners as the shares –and their losses – rose. That buying took the shares higher still, forcing yet more sceptics to throw in the towel, creating more buying and so on, in a vicious circle for short-sellers and a virtuous one for long-term shareholders.

“However, that squeeze now looks to be over. Data from www.shorttrackers.co.uk suggests that only 1.4% of Ocado’s shares had been sold short, according to regulatory disclosures, in early August, down from more than 21% in summer 2016.

“And two hedge funds, GMT Capital and Marshall Wace, both appear to be testing the waters once more, by going short again, possibly encouraged by the absence of any major shorts, Ocado’s even loftier valuation, and sales of shares by senior Ocado executives worth more than £100 million.

“Whatever the reason, Ocado’s shares have dipped back below £10 and today’s third-quarter results are unlikely to change the minds of either supporters or sceptics, as retail sales growth, average order growth and average basket size all stuck to recent trends.

 
Source: Thomson Reuters Datastream

“Retail sales grew 11.5% year-on-year in the third quarter, compared to the 11.7% rate of advance recorded in Q1 and Q2.

 
Source: Company accounts. Fiscal year to November.

“Average orders per week came in at 283,000, some 11.4% higher than a year ago and consistent with the 11.1% and 11.9% growth rates generated in Q1 and Q2.

 
Source: Company accounts. Fiscal year to November.

“Finally, average basket size came in flat year-on-year at just above £106. 

 
Source: Company accounts. Fiscal year to November.

“These figures are clearly enough to please fans of the stock, since the shares are up today, but in the long run sceptics will want to see how Ocado can turn its licensing deals and grocery deliveries into profits and cash flow if they are to finally decide they are better off leaving the company alone and find other short-selling targets.”
 

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