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The Ocado share price rose 11% in a day – 3 reasons I think it’s still a great buy

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The Ocado (LSE: OCDO) share price has performed superbly well in 2020. But it was an outlier yesterday even by its own high standards. The FTSE 100 online retailer’s price jumped almost 11% from the day before. As I write this Wednesday morning, it’s still rallying. If, as an investor you are now hesitant to buy the stock, it’s understandable. After all, there’s risk to buying a stock at such highs. I think otherwise, though. Allow me to try and convince you otherwise with the following three arguments. 

Cheap UK shares are appealing, are they? 

First, the appeal of cheap UK shares is undeniable. When FTSE 100 companies’ shares are available at low price-to-earnings (P/E) ratios or low absolute prices, they can appear to be a bargain. And it may well be the case. As the stock market crash struck, both share prices and earnings ratios fell across the board. However, many shares’ prices have bounced back sharply since. Others have remained weak. 

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In my assessment, share prices of two kinds of stocks have remained weak. One, those that have been hit hard by coronavirus. Think hospitality, travel, and entertainment. Two, those that were weak even before Covid-19 struck. Think banking stocks. On the other hand, companies with both strong prospects and performance, like Ocado, AstraZeneca, and London Stock Exchange Group have seen significant increases in share prices. If a stock market crash happens again, it follows that these are the ones to load up on.

Ocado share price rose during the lockdown

Two, it’s true that some part of the company’s performance – its retail revenue grew 52% in the quarter ending 30 August 2020 compared to last year – is a blind stroke of luck. Restrictions on movement, personal precaution, and ease of online ordering led to a surge in online shopping. While this growth spurt may cool off somewhat as things return to normal, Covid-19 may have quickened the speed of the transition to e-commerce as well. Companies have long been adding online stores, and it’s really a foregone conclusion that digital shopping will rise over time. In other words, Ocado exists in an expanding marketplace, which bodes well for it. 

Strong positioning

Third, it’s in a unique and advantageous position as an early starter. It’s the only FTSE 100 online grocery retailer today. Sure, there are other big retailers like Tesco and J Sainsbury, but they are more the brick-and-mortar variety right now. In any case, Ocado works in conjunction with big retailers. In other words, it isn’t just competing with other retailers. Earlier it collaborated with Waitrose and it now has a tie-up with Marks & Spencer. As a long-term investor in the most promising companies of tomorrow, I’d consider Ocado’s shares. Even if the Ocado share price looks steep right now, I reckon that when we look back at it in the next few years, it’s will look like a good time to have bought the stock.  

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Manika Premsingh owns shares of AstraZeneca and Ocado Group. The Motley Fool UK has recommended Tesco. 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.

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