The Ocado share price was one of the few to hold firm during the stock market crash. With the nation in lockdown, home food deliveries became an essential service. Astonishingly, the FTSE 100 group is up 60% in this turbulent year, against a 15% drop on the index as a whole. Yet I’d be wary of buying it today.
The Ocado Group (LSE: OCDO) share price success is no flash in the pan. It’s one of the most successful on the FTSE 100, rising an incredible 580% in just three years. So why would I choose to buy the Royal Dutch Shell (LSE: RDSB) share price instead?
My big fear is that Ocado’s shares have risen too fast, too quickly. The online grocer has a lot of hard work ahead of it, to justify today’s valuation. It may get there, but recent share price growth could go into reverse if it has any setbacks.
FTSE 100 stock market crash hero
The lockdown delivery surge that saw customers battling for precious Ocado slots is over, unless we get a second wave of the pandemic. Competition in this area may rise too. Witness the tie-up between Aldi UK and Deliveroo.
Group sales doubled in the second quarter, but that can’t continue. On the other hand, Ocado will have picked up new customers, many of them elderly who will continue to see the benefits of shopping online.
To justify today’s sky-high Ocado share price, management has to deliver on hopes of becoming a global technology company, helping grocers around the world robotise their warehouses. It’s an exciting target, but expensive to achieve. Ocado has posted a loss for five years in a row.
The good news is that revenues are growing at a much faster rate than others in the supermarket sector. The Ocado share price could climb higher still, but I think the pace has to slow and it’s also vulnerable to bad news.
By contrast, Royal Dutch Shell has had a rotten year. The twin stock market and oil price collapse hit it hard. Its legendary dividend, never been cut since the Second World War, has finally fallen. At least for now.
Better value than the Ocado share price?
The Shell share price is still down a third this year, despite its recent recovery. It trades at just over nine times earnings. That looks a tempting valuation, especially with oil now climbing, and Brent crude trading above $42 a barrel.
As the world emerges out of lockdown, demand may increase. At the same time, OPEC+ production cuts may hold. The oil price may climb higher. If it does, pressure will grow to bring the dividend back.
When it does return, the Shell share price could enjoy another jump upwards. It’s up 16% over the last month and I think it has more scope for growth than the Ocado share price.
Naturally, Shell faces plenty of challenges too. Notably the long-term shift away from fossil fuels, and into renewables. However, many of the risks are in today’s price. Now may prove a good time to buy this FTSE 100 dividend hero, before it recovers further.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.