The supermarket sector has been well and truly shaken up by the Morrisons bidding war. It appears to have been won by US private equity firm Clayton, Dubilier & Rice, whose £7bn offer edged out rival Fortress. Now, it seems, supermarket fever is spreading to the Ocado (LSE: OCDO) share price.
Ocado shares had slumped since peaking in January at 2,888p. By 13 August, the price had fallen 38%. That’s a big drop, and it comes at a time when the groceries business is picking up and supermarket share prices are strengthening. Even Marks & Spencer, which has a partnership with Ocado, is looking positive in 2021.
We do need to see it in perspective, though. By the middle of August, Ocado was still up close to 50% over two years. It started spiking upwards when Covid-19 struck, and home deliveries were suddenly a hot thing.
Since flotation, the Ocado share price has soared more than 1,000%. That super-rapid growth makes Ocado very hard to value, at least for me. Is it “the world’s largest dedicated online grocery retailer,” as it has billed itself? Or is it a technology company supplying the hardware and software for others to get into the online shopping business?
Two investments in one
It’s both, really. And the market seems to still be trying to work out how to apportion values to the different parts. That’s especially hard as we still haven’t seen any profits, even if revenue is growing. Still, 2020 brought a much reduced pre-tax loss. And I have to wonder if we’re close to seeing a swing to sustainable profits.
Anyway, let’s get back to the events of the past couple of weeks. Since the recent low on 13 August, the Ocado share price has spiked by 15%. Incidentally, the Marks & Spencer share price leapfrogged Ocado, jumping 22% in the same time.
Does it mean investors are expecting takeover bids to emerge for Ocado and for M&S now? I do think we might see more acquisition action in the groceries business in the coming months. And private equity firms seem to have the money to invest and the appetite for taking a risk. But I seriously doubt there’s enough investment cash washing around to take out all of Morrisons, Ocado, M&S, and Sainsbury. So some folk investing in those stocks in the hope of a quick buyout profit are very likely to be disappointed, I reckon.
Ocado share price direction?
I just don’t know how to value Ocado at the moment. A fresh price surge on the back of renewed growth investor interest, or a fall-off in sales as we get back to normalised shopping? I think we could see either of those. So what will I do?
My solution is simple. If I find a stock hard to value, there’s no need to panic. I can just skip it and move on to others that I feel I have a good handle on. Some investors like a bit of higher-risk growth investing, and I wish them success if they go for Ocado. But I’ll stick to profitable companies paying me fat dividends.
