I added two new FTSE 100 shares to my portfolio in August. You could say these stocks are unloved, as both have lost more than half their market value in the last three years. Here’s why I’ve taken a shine to them.
Buy number one
The first FTSE 100 stock I snapped up in August was online grocer Ocado (LSE: OCDO). The share price has done well in recent months, but over a three-year period it is down by around 68%.
I have considered investing in Ocado stock before but I was put off by the company’s ballooning losses and high price-to-sales (P/S) valuation.
Today, the stock has a P/S ratio of 2.3, which is the cheapest it has been since 2017. However, the firm registered a pre-tax loss of £501m last year, up from £177m in 2021. And ongoing losses remain a concern.
So why have I invested?
Well, as I see it, Ocado essentially has two parts to its business. There’s the Ocado Retail joint venture with Marks and Spencer, which is slow-growing but still makes up most of the revenue. And then there is the fast-growing Technology Solutions division, which runs automated warehouses on behalf of leading supermarkets around the world.
Though costly to build out, I think these high-tech fulfilment centres could become incredibly valuable. We saw early evidence of this in the firm’s first-half report, which revealed that revenue in this division jumped 59% year on year to £198m. Importantly, this business turned an underlying profit, posting EBITDA of £5.9m compared to a loss of £58.8m in H1 2022.
The fees that Ocado charges its partners are tied to capacity size and sales, as well as technology running costs. It doesn’t deal with staff, stock, or the leasing of delivery vehicles. Therefore, this division’s profit margins could one day be substantial.
Ocado now has 25 robotic warehouses live across the globe, its most recent one being with AEON, Japan’s largest grocer. But it plans to open dozens more in the years ahead.
Buy number two
My second buy was York-based housebuilder Persimmon (LSE: PSN). Its share price has fallen 60% over three years, as cost inflation and then 14 consecutive interest rate hikes have shaken the housing market to its foundations.
However, Persimmon shares have fallen more than other FTSE 100 housebuilders recently. That’s because mortgages have become increasingly unaffordable for prospective first-time buyers, who make up a large part of Persimmon’s business. The recent ending of the government’s Help to Buy loan scheme also hasn’t helped.
All these problems were reflected in the developer’s H1 results. New home builds were down 36% from H1 2022 and pre-tax profit plunged 66% to £151m.
Until we get clarity around how high borrowing costs will go, I’m not expecting the share price to rebound sharply. Also, with its market cap now at £3.36bn, Persimmon could be demoted from the FTSE 100. That could cause further volatility.
However, due to the chronic undersupply of homes in the UK, the longer-term outlook for the company remains positive. Net migration to the UK reached a record high last year and is expected to continue adding to the population.
Persimmon is Britain’s second-largest housebuilder, so I’m hoping for strong returns through the next property cycle.
