The FTSE 100 had a rather lacklustre November. Yet for some individual constituents, it was a different story. Ocado Group (LSE:OCDO) was one of the top performers. The share price jumped a whopping 28% during the month. Even though the share price is still down 4% over the past year, events recently have become a catalyst.
A trailblazer
The main driver last month for Ocado was a new deal struck with McKesson Canada. Historically, supermarkets have made use of Ocado’s automated fulfilment technology via its warehouses. Yet McKesson is a pharmaceutical company. So this marks the first deal made outside of the retail space for Ocado’s tech.
This is good news on all fronts. Not only is it another customer for this company’s growing division, but it shows there’s demand from very different sectors. This vastly increases the target market and the potential revenue in the future.
The stock jumped when factoring in the long-term benefits this could provide. After all, Ocado said the deal “will be minimal on cash flow and earnings in the current financial year”. Financially, we’re looking at 2025 before it really helps finances.
Sentiment on interest rates
Another factor that helped to lift the stock was a change in sentiment about interest rates. The Bank of England policy committee decided against raising the base rate in October, so there’s a growing feeling we have now reached the peak rate. In fact, I think we could now see some rate cuts in 2024.
This is positive for Ocado. The business (like many growth stocks) has high levels of debt to fuel growth. The H1 2023 report showed net debt increasing from £577.1m the year before to £900.7m.
Higher interest rates make it more expensive to service existing debt and to raise more debt. So if it’s true that interest rates have reached the highest level and should start to fall, it’s good for the business.
Granted, investors need to be careful here. At the moment it’s just speculation.
The direction from here
Despite the jump, the stock is still heavily down over a longer time period. For example, over the past three years, the share price has fallen 73%. Even with the rally in November, the share price is only back to levels seen in October.
The business is yet to record a full-year profit. Based on the H1 2023 figures, it won’t happen this year either. I think there’s still some concern about whether the company will ever breakeven.
I’m not saying this spark might not continue. In fact, I think in the coming few months it could continue to rally. If more deals are announced, I’d expect more investors to jump on board.
But until the business can fundamentally pivot to shrinking losses and flipping to a profit, I’m not going to buy.
