One thing I often do as part of my investment research is look at what stocks the top-performing funds are holding. I find that this can be an excellent source of investment ideas.
Recently, I was examining the holdings of the Baillie Gifford Global Discovery Fund. This is the top-performing global equity fund on Hargreaves Lansdown over the last five years with a return about 210%. Looking at the top 10 holdings, one thing struck me – Ocado (LSE: OCDO) was the second largest (with a weight of 4.2%) behind Tesla.
That got me wondering. Should I buy Ocado shares myself?
Ocado shares: the investment case
Ocado has two things going for it right now. Firstly, as a pure online grocer, it’s the fastest growing supermarket in the UK.
In September, the company – which has now partnered with M&S – said retail revenue for the 13 weeks to 30 August grew 52% as the channel shift to online grocery in UK continued. More recently, in early November, the group said trading has remained strong through the fourth quarter of the current financial year. It also said it continues to see high demand as consumers migrate to online grocery in record numbers.
Clearly, this side of the business has momentum right now. Given that its market share is still under 2%, there could be plenty more growth to come here.
But the retail side of the business is only part of the story with Ocado. The really exciting part, in my view, is its technology offering, the Ocado Smart Platform (OSP). Built to change the nature of grocery e-commerce globally, this is an end-to-end suite of solutions for operating online grocery businesses. The automation technology helps other retailers increase productivity, enhance flexibility, and generate higher profit margins.
Ocado has already signed a number of key deals for its OSP technology with major supermarket groups around the world, including Kroger in the US, Groupe Casino in France, and Aeon in Japan. And looking ahead, it believes that it’s likely to see more demand for its technology from current and prospective partners. That’s mostly due to the accelerated shift to online grocery shopping as a result of Covid-19.
No profits
Now, while this all sounds very promising, it’s important to realise that Ocado is not making a profit. This year, analysts expect the company to generate a net loss of about £170m.
This means Ocado shares are higher risk. Generally speaking, I avoid companies that aren’t yet profitable. I prefer to invest in companies that can demonstrate a strong track record of profitability. These types of companies tend to be lower risk.
That said, unprofitable companies can turn out to be amazing investments. Just look at Amazon. It was unprofitable for years but has delivered enormous returns for long-term investors.
Should I invest?
Overall, I think Ocado shares could be worth a small investment as a speculative growth play. The long-term growth potential looks significant, in my view. Not only should the group enjoy growth from its retail segment, but it should also see strong long-term growth from its automation solutions division.
That said, it’s riskier than other FTSE 100 growth stocks simply because there are no profits.
