Ocado (LSE: OCDO) shares have been one of the worst performers in 2022. The stock has slumped nearly 50%, compared to just a 5% fall seen by the FTSE 100.

The shares have come under pressure in recent times. However, does this fall open an opportunity for me to add a bargain to my portfolio?

A rocky road for Ocado

The stock’s price has been on some journey over the past few years. With the Covid-19 pandemic taking full grip of our lives, the online grocer saw a boom in business as consumers were forced to take their shopping habits online. Its retail business saw a 35% jump in revenue for 2021. And during this booming period, its share price hit an all-time high of nearly 3,000p.

However, 2022 has told a different tale. Inflationary pressures have seen consumers batten down the hatches as rising rates have eaten away at incomes. And with grocery prices consequently rising, it’s clear to see Ocado has taken a hit. The firm has placed itself among the upper echelons of grocery retailers, having recently partnered with Marks & Spencer (and previously Waitrose). So as the popularity of budget retailers like Aldi and Lidl continues on an upward trend, the outlook for Ocado has turned sour.

Where next?

So, where does the business go from here?

Well, it recently raised £578m from investors as it looks to continue the rollout of its e-commerce technology. The group has taken large strides to expand its capabilities, including the creation of over 50 customer fulfilment centres across the world.

The firm charges third-party retailers to use its technology, so an increase in centres should come with a boost in Ocado’s revenues.

However, investors don’t seem to be convinced. The stock dropped 5% as the company issued new shares at a 9% discount. Ocado has failed to turn a profit despite heavy investments. And with this latest round of cash raising, it looks like market spectators fail to see a way out for the firm.

It has also expanded the territories it operates in recently, notably in France and Poland. This expansion opens new markets, which of course, could be a benefit for Ocado. However, with a lack of agreements in these regions, the outlook remains dire.

Ocado released a trading update back in May where it downgraded its full-year outlook. The business stated that the average basket value had fallen 9% year on year. And that sales had dropped 8% so far for the quarter. As such, the firm lowered its expected sales growth from the previous 10% to low single digits. Its half-year results are due this month, so it will be interesting to see how it has fared.

Why I’m not buying

The pandemic was key in highlighting that Ocado can succeed. And with the amount it’s pumped into its expansion, it could see this pay off over the long term. However, I’m not convinced. I struggle to see a way back for Ocado. And with a gruelling period ahead of them as costs continue to rise, I think the stock will lag. I won’t be buying Ocado shares any time soon.

The post Is now the time to buy cheap Ocado shares? appeared first on The Motley Fool UK.

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Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended Ocado Group. 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.

Tesco (LSE: TSCO) and Ocado Group (LSE: OCDO) are two FTSE 100 supermarket stocks that have experienced different fortunes over the past couple of years. While the Tesco share price went into freefall in early 2021 during the coronavirus pandemic, the Ocado share price soared in tandem with rising consumer demand for online grocery shopping. However, things have changed recently. On a 52-week basis, the Tesco share price is up by 19% compared to a -45% drawdown for Ocado. 

Let’s examine which stock I believe offers better value at today’s prices.  

Tesco share price: a value proposition 

Tesco is the UK’s largest supermarket chain. It also runs operations in central Europe and Asia in addition to a retail banking division. With consistent demand for its groceries and a traditional bricks-and-mortar business approach, for me, Tesco stock is a defensive investment prospect. The company’s market cap is over £28.3bn and Tesco has historically offered shareholders reliable dividends and earnings growth.  

The Tesco share price stands at around 273p, slightly towards the upper end of its five-year trading range from a low of 210p in 2017 to a high of 337p in 2018. Tesco’s price-to-earnings ratio sits just above four, making it one of the cheapest FTSE 100 shares. Moreover, the stock’s current dividend yield of 3.28% is pretty close to that of the FTSE 100 index as a whole, at 3.56%.

As inflation rises, the Tesco share price could come under pressure. Rising food costs and supply chain disruptions could act as bearish headwinds. However, Britain’s largest supermarket looks better placed to cope with these threats than many direct competitors, such as Sainsbury’s and Marks & Spencer, due to strong customer loyalty.

Over 20m Brits own a Tesco Clubcard. Although Tesco operates in an intensely competitive market, the discounts Clubcard holders benefit from should mean the Tesco share price will resume its upward trajectory over the coming months in my view, despite the inflationary environment.

Ocado share price: a growth stock

In contrast to Tesco, Ocado is a more speculative stock for me. Ocado specialises in online grocery shopping, but it also resembles a tech stock in some ways. For instance, the company uses AI in its Ocado Smart Platform to offer efficiency improvements in its partners’ grocery e-commerce operations.

The Ocado share price typically experiences greater volatility than the Tesco share price. Furthermore, Ocado currently trades at a negative P/E ratio, does not distribute dividends, and has never turned a profit. This concerns me as Ocado has been trading for over two decades. 

Bulls can argue that Ocado is one of the most innovative companies in a sector dominated by more traditional business models, with its focus on software and warehouse robotics. If this really is the future of retail, Ocado shareholders should stand to benefit.

Nonetheless, Ocado posted a pre-tax loss of £177m for 2021. As consumers revert to their pre-pandemic in-store shopping habits, I’m struggling to be optimistic for Ocado’s share price.  

Which FTSE 100 stock is the better buy for me?

Right now, I’m looking to invest in quality stocks and de-risk my portfolio away from more speculative plays. Accordingly, for me, Tesco constitutes a good value stock to invest in for 2022. I view Tesco as a better buy for me than Ocado at present. 

The post Ocado vs Tesco share price: which FTSE 100 stock is the better buy? appeared first on The Motley Fool UK.

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Charlie Carman does not own shares in any of the companies mentioned. The Motley Fool UK has recommended Ocado Group, Sainsbury (J), and 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.

ITV

Broadcaster ITV (LSE: ITV) is down to publish final results on 3 March. 

Unlike other loosely-labelled ‘value’ stocks, shares in the £4bn cap haven’t really benefited from the rotation away from growth plays in recent weeks. That’s despite Covid-19 restrictions coming to an end and the company making lots of positive noises about a recovery in advertising revenue when it last reported to the market in November. Perhaps traders are concerned that viewing figures will drop as people prioritise getting out more in the months ahead.

The invasion of Ukraine by Russia has shown just how few ‘safe havens’ there are in the stock market. I certainly wouldn’t include ITV in this category given the competition it faces from companies such as Netflix and Amazon. At seven times forecast FY22 earnings, however, I continue to believe that the shares are too lowly rated, especially if dividends are reinstated in the near future. 

The road ahead could still prove bumpy. Even so, I’d be willing to buy at the current level. 

Deliveroo

Also reporting next month is takeaway delivery firm Deliveroo (LSE: ROO). It’s down to release full-year results on 17 March. 

As an investment, I’ll admit to not being the company’s greatest fan. In fact, I stated last December that I’d only consider getting interested in the stock if it fell by another 50%. Since then, it’s tumbled by 45%. 

Now, a lot of this isn’t necessarily down to anything Deliveroo’s done or not done. The aforementioned exodus from highly-valued growth stocks since the beginning of 2022 has been pretty indiscriminate. That said, the company’s lack of profits can’t have helped. With rampant inflation now squeezing discretionary income, I’m wondering if there could be a few nasty surprises to come next month. 

Investors will be looking to see whether the company has managed to hit the 7.5%-7.75% gross profit margin guidance it gave in its last update. If not, I can see the share price being hammered again. Unsurprisingly, I don’t intend to snap up this stock before then.

Ocado

A final FTSE 100 stock I’ll be watching next month is Ocado (LSE: OCDO). An update on Q1 trading is expected on the same day as Deliveroo’s results: 17 March.

As impressive as the company’s automated warehouses are, I’ve long been perplexed by how an unprofitable business like this can occupy a space in the top tier. In fact, recent share price activity suggests more investors are tiring of the company’s ‘jam tomorrow’ strategy. Ocado’s valuation has tumbled 40% in the last year.

Sure, the recent full-year numbers weren’t bad. Revenue for the 12 months to 28 November was 7.2% higher (at £2.5bn) than the previous year. Five high-tech Customer Fulfilment Centres (CFCs) were also opened over the period. However, the big question now is whether trading has been impacted by galloping prices. If it has, Ocado’s downward trajectory could continue in March. 

I’m not going anywhere near the stock until I get some clarity on this. 

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon, Deliveroo Holdings Plc, ITV, and Ocado Group. 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.

The Ocado (LSE: OCDO) share price is down heavily today. That’s despite the company reporting what appears to be a fairly robust set of full-year numbers. What’s going on?

Revenue up

Let’s focus on the good stuff first.

At £2.5bn, revenue for the 12 months to 28 November was 7.2% higher than the previous year. As one might expect, the vast majority of this came from retail sales via its joint venture with Marks & Spencer. One thing that’s particularly worth highlighting here is that sales were also 41.5% higher compared to pre-pandemic levels. This, if anything, goes some way to endorsing CEO Tim Steiner’s belief that online grocery demand is “here to stay”.

Away from its retail arm, Ocado opened five of its high-tech Customer Fulfilment Centres (CFCs) over the period. Seen by many investors as the reason to own the stock, two of these were located in the US. This, in turn, helped revenue from its international solutions arm soar over 300% to £66.6m. A total of 13 sites are now up and running around the world.

What’s got investors so frustrated?

Unfortunately, the company hasn’t been immune to worker shortages. A lack of HGV drivers served as a growth headwind in the second half of the year. A fire at its Kent distribution centre last July also reduced capacity. 

Collectively, these factors — combined with the ongoing costs of developing its tech — may go some way to explaining why the Ocado is out of favour again today.

Ocado share price: opportunity or warning?

Taking into account today’s significant fall, the Ocado share price has now tumbled 23% in 2022 alone. The performance over the last 12 months is even more depressing for loyal holders. No less than 56% has been wiped off the company’s value.

As someone focused on growing wealth over the long term, should I see this as an opportunity to build a position?

Looking at the positives, it’s clear that Ocado’s tech is in demand with a total of nine CFCs due to open in 2022. Assuming the company really can help partners “go-live quicker, at lower cost and achieve higher margins and returns on capital“, I can only see this annual number rising in future years.

The company is also proving increasingly popular with shoppers. Customer numbers rose 22% over the last financial year and orders rose nearly 12% to 357,000. 

On the flip side, a £9bn valuation remains lofty considering this company made a loss of £177m in 2021 due to increased investment. And even if Ocado made all the right moves from here, there’s a possibility that shareholders could see the value of their holdings fall further in 2022 as the market grows increasingly averse to ‘jam tomorrow’ companies.

A safer bet?

The awful performance of the Ocado share price in the last year is further evidence that no investment is risk-free. It also highlights that sentiment towards even the biggest UK companies can quickly reverse.

Personally, I’m in no hurry to buy this beaten-down stock today. In fact, I’d be more inclined to buy a slice of market-leader Tesco.

While lacking Ocado’s technical know-how and growth prospects, its forecast £60bn revenue is 24 times that of its FTSE 100 peer. It has its own risks, but may also be regarded as a better option for coping with inflationary times due to its pricing clout and 3.7% dividend. 

The post What’s going on with the Ocado share price? appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Ocado Group and 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.

Trading update

Building on the momentum seen in 2020, Tesco revealed that business had continued to be “strong” over the 13 weeks to 29 May.

In the UK and ROI, sales rose to just over £12.4bn during the quarter. This was a 1.3% increase on a one-year like-for-like basis. That’s certainly no disaster given the strong comparatives from 2020. On a two-year like-for-like basis, the figure was up 8.7%.

In the UK alone, Tesco noted that the 9.3% rise in like-for-like sales over two years shows just how much the company benefited from people eating more at home compared to before the pandemic arrived on these shores. The 9.2% increase in sales at the company’s wholesale business (Booker), thanks to a recovery in the hospitality sector, was also worth noting and bodes well for the future.   

What now?

Commenting on today’s numbers, CEO Ken Murphy declared that Tesco’s guidance on profit had not changed. 

Of course, nothing can be guaranteed. While the grocery sector is a lot more defensive than other parts of the market (everyone still needs to eat), there’s still a very real possibility that sales at Tesco and its peers will slow more than expected. This is particularly the case for online orders, which exploded over the last year.

In fact, there’s evidence that this is already happening. Today, the £18bn cap revealed that sales growth has “moderated” over the last couple of months in line with the phased lifting of restrictions. This may help explain why the Tesco share price is retreating today.

Although market commentators disagree over whether inflation will persist or not, a rise in food prices may also hit margins for a while. Naturally, attempting to pass these increases on to customers won’t work because of how competitive the industry is. People will just shop elsewhere. 

Best buy

Investors like me are spoilt for choice when it comes to investing in this sector. In addition to Tesco, there’s also FTSE 100 peer Sainsbury’s and FTSE 250 rival Morrisons. Given its technical expertise, a more growth-oriented investor may also be attracted to the potential of Ocado. 

Personally, I’m still inclined to believe that Tesco remains the best of the bunch. As far valuations go, the FTSE 100 stock trades on a little less than 13 times forecast earnings. That’s slightly lower than Morrisons (13 times earnings) and only slightly more than Sainsbury’s (12 times earnings). Based on its ongoing dominance of the market, I can’t help but think Tesco gives investors the most bang for their buck. 

But it goes beyond valuations. As I explained last month, the notable short interest in both Sainsbury’s and Morrisons make them unattractive options, in my view. For all its promise, Ocado is still not consistently profitable. 

In addition to its valuation, Tesco also offers a great dividend stream. Analysts currently have the company returning 10.5p per share in FY22. That’s a yield of 4.6% based on Tesco’s share price right now. 

All told, this remains my first choice in the sector and I’d feel comfortable buying the stock today.

The post The Tesco share price is down but I’d still buy appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons, Ocado Group, and 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.

The Marks and Spencer (LSE: MKS) share price was on the front foot this morning, despite the company reporting a huge loss as a result of the coronavirus pandemic. Should investors like me take this as a sign that all the pain is priced in and the shares are finally worth buying?

Big loss

Sure, today’s full-year numbers were never going to be pretty. The closure of high streets and multiple UK lockdowns would never be good news for the 137-year-old, former FTSE 100 firm.

Group revenue came in at just under £9bn for the 52 weeks to 27 March. This was 12% lower than in the previous financial year. MKS’s food sales continued to offset poor performance elsewhere with like-for-like revenue rising 1.3%, supported by its deal with online grocer Ocado. In contrast, revenue from its Clothing & Home ranges plummeted 31.5%.

It gets worse. Profit before tax and one-off costs fell to just £41.6m. That’s a 90% fall from the £403.1m achieved in the previous year. Once those costs are factored in, a pre-tax loss of £201.2m was reported, down from the £67.2m profit achieved in the previous year.  

Contrarian play?

The fact that the MKS share price is rising today can’t make up for the fact that the firm, from an investment perspective, has long been a losing bet, I feel. Over the last five years, its stock has more than halved in value. By contrast, the FTSE 250 that Marks features in is up 31%. In other words, investors could have achieved a far better return by buying a simple exchange-traded fund that tracks the index. But could now be the time to buy?

There are a few reasons to be hopeful. In addition to the reopening of high streets, CEO Steve Rowe’s strategy to transform the company (the Never the Same Again programme) appears to be gathering pace. The deal with Ocado is bearing fruit with M&S products now making up over 25% of Ocado’s average basket. The firm also reported growth of 53.9% in online clothing and home revenue today, helping to justify the decision to close underperforming physical stores. 

However, there are still things that would make me wary as a potential investor. 

Buyer beware

After so many false starts, I remain sceptical that Marks can succeed in attracting shoppers back to its stores. Talk of building “a trajectory for future growth” and making the company “special again” sounds great. However, we’ve been here before. The retailer needs to find and retain a lot of new customers. That’s a big ask.

There are other things I don’t like. Net debt still stands at just over £3.5bn including lease liabilities. Forget having a “strong liquidity position” — why buy M&S when there are online-only operators boasting massive financial war chests and no physical stores to maintain? Elsewhere, operating margins have been woeful for years, as have the returns on capital invested.

In addition to all this, MKS isn’t currently paying dividends. As such, shareholders aren’t being compensated for their patience. To me, this makes the opportunity cost of not investing elsewhere very high.

Bottom line

Today’s share price suggests that a lot of the pain is priced in and that MKS shares might finally worth buying. With so many better options available in the market, however, I’d wait to see signs of real progress before considering adding the shares to my portfolio.

The post Are Marks and Spencer (MKS) shares finally worth buying? appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Ocado Group. 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.

Unfortunately, this hasn’t been reflected in the performance of the Tesco share price to date. I think this is set to change over the rest of 2021.

Tesco share price: opportunity knocks

Based on current analyst projections, Tesco trades on 11 times forecast FY22 earnings. This makes it the cheapest of the listed supermarkets to acquire. I think that’s very attractive considering Tesco remains the clear market leader in the UK. Despite the huge growth achieved by German discounters Aldi and Lidl over the last few years, Tesco still commands 27% of the market. Sainsbury, in second place, has just over 15%.

The reason for this low valuation relates to the huge jump in profits expected once the coronavirus storm has passed. These have been held back as a result of the additional costs the retailer has faced from needing to adapt its stores and delivery service in response to Covid-19. This helps to explain why the FTSE 100 index is up almost 30% since last March’s market crash but the Tesco share price is down almost 20%.

Even if a recovery takes time, Tesco looks like a great stock for income seekers. Analysts have the company returning 10.7p per share in the current financial year. That becomes a yield of 4.7%, based on the Tesco share price as I type. This goes some way to compensating for the fact that holding individual company stocks involves more risk than buying a fund tracking an index. For comparison, The FTSE 100 currently yields a little under 3.2%.

In addition to the bigger payout, Tesco’s dividends look set to be covered almost twice by profits. In other words, it’s very unlikely to be cut, or not paid, at least as things stand.

Tech threat

As bullish as I am on Tesco, this doesn’t mean there won’t be some turbulence ahead. For one, the coronavirus pandemic could conceivably continue to hold back profits if (and that’s a big ‘if’) the UK experiences a third wave like some European countries. 

Another potentially more long-lasting threat is the possibility that e-commerce giant Amazon may acquire one of Tesco’s rivals (Morrisons seems the most likely candidate) and/or dramatically grow its presence on UK high streets.

As things stand, the latter looks more probable. In the last month, the US company has opened two Amazon Fresh branded stores in London. Instead of using self-service tills or queuing up, customers open an app on their phones on arrival. The app then records what they take out of the store and bills the person accordingly.

Now, whether this innovation is sufficient to worry Tesco is hard to say. In time, the company could end up introducing similar technology to its own stores. Nonetheless, I do think it’s worth bearing in mind before clicking the ‘buy’ button.

Tesco remains the go-to option in this sector, in my opinion. It may not boast the pulse-quickening excitement of a stock like Ocado but I think it’s a far better pick for more defensive-minded, get-rich-slowly investors like me.

The post The Tesco share price looks great value to me appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Ocado Group and 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.

But over the past few weeks, the share price has begun to decline. Why? And is this a potential buying opportunity for my growth portfolio? Let’s take a look.

Why did the Ocado share price fall?

The business published its full-year 2020 results in early February and I think the company is performing quite well. Total revenue increased by 32.7%, primarily due to UK operational growth. And its International Solutions segment looks like it’s taking off with revenue rising from £0.5m to £16.6m.

The firm remains unprofitable, but its losses also declined from £214.5m in 2019 to £44.1m in 2020. So why is the Ocado share price falling?

As I see it, investors are being more cautious due to two factors. The first is the potential introduction of a digital sales tax. The second is the expectation of a slowdown in online sales growth as more of the population gets vaccinated against Covid-19. Personally, I’m not overly concerned about either of these threats. And here’s why.

Ocado is building a robot army

As previously stated, the recent pullback in the Ocado share price is likely linked to its online supermarket segment. While that does currently generate the most significant portion of revenue, it’s no longer the primary focus of the business. But the stock pivoted in 2019, transforming into a technology-led software and robotics solutions company. So what does that mean?

Basically, it built a robot army to help automate the majority of the process of producing, packaging and delivering groceries to retailers worldwide. Today, over 10 supermarket chains — including Morrisons, Coles, and Kroger — have signed up to use its robot-driven platform.

What I find particularly promising is the prospect of a network effect forming. As more companies join the platform, its resources grow. This subsequently enables faster innovation to improve efficiency, which in turn attracts more companies to sign up. 

There are many challenges ahead

While the robot-driven platform is vastly different from the home delivery of food, it still serves the same market – groceries. This means that the regulatory requirements for producing and packaging food must be maintained. This is a task made even more complicated by its international operations as the rules vary from country to country.

Any delays or disruptions in the supply chain would likely damage Ocado’s reputation as well as the relationships with its platform customers. Even more so if the cause is a regulatory breach.

Another significant risk that may lead to operational disruption is the workforce itself. The majority of Ocado’s employees are EU nationals (for now). This adds additional complications as the UK is no longer a member of the EU. Thus most workers will have to acquire visas. While this is only a short-term problem, it could lead to the potential loss of key personnel.

Would I buy Ocado at the current share price?

There are certainly plenty of risks ahead, but the business is trying to redesign supermarkets’ grocery supply chains. If it succeeds, robots could become the new standard way of doing business for all grocery stores. Personally, I think the risks are worth the reward and so Ocado looks like it could be a fine addition to my portfolio.

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Zaven Boyrazian does not own shares in Ocado. 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.

Is my long-held suspicion that the shares are overbought finally ringing true, or is this a mere short-term blip?

Ocado sales soar

This morning’s numbers relate to Ocado’s retail arm — the joint venture it formed with battered former FTSE 100 member Marks & Spencer back in February 2019.

Thanks in part to another lockdown, retail revenue soared 35% over the 13 weeks to 29 November to just under £580m. According to the company, this compares favourably to the normal peaks and troughs experienced before the coronavirus arrived. It also suggests customers have been receptive to the firm’s switch in trading partners, to M&S from Waitrose in September.

Ocado received an average of 360,000 order per week over the period — up 3% from Q4 2019. Despite the additional demand, it was able to achieve “high rates of on-time customer delivery and low rates of substitutions,” according to Retail CEO Melanie Smith. The average order size was £133 — evidence, Ocado believes, that shoppers’ behaviour was continuing to “normalise.“

Priced in?

It seems fair to say Ocado shares have been one of the better FTSE 100 buys in 2020. Those placing the stock in their shopping basket at the beginning of January would be sitting on a gain of around 75%. That’s after taking today’s fall into account! The question is, how much of this good news is now priced in?

Based on this morning’s reaction. I’d say quite a lot, especially as the company raised earnings guidance again today. It now expects full-year earnings to be “over £70m” compared to its previous prediction of over £60m. And yet traders weren’t impressed!

Part of this may be explained by the fuzzy outlook. Within today’s statement, Ocado said sales and earnings growth in the next financial year will depend on how quickly trading normalises. It’s also dependent on when three new warehouses become operational. These are expected to add 40% more capacity to the business.

Market minnow

But is this reaction really that surprising? After all, Ocado is still trading at a loss, due to the huge investment it’s needed to make over the years. As impressive as its operations are, the FTSE 100 company is already valued at over £17bn. That’s the sort of staggering valuation we’d expect from flash (overhyped) US tech stock. Sure, Ocado might utilise market-leading software, but no share is worth buying at any price. 

On top of this, it’s worth remembering Ocado doesn’t operate in a vacuum and the grocery market remains as cut-throat as ever. Depending on how the UK economy fares in 2021, it’s possible more people will switch away from M&S to cheaper options out of necessity.  

It’s not as if Ocado has a commanding presence either. In November, it had just a 1.7% share of the UK market, according to Kantar. FTSE 100 peer Tesco, on the other hand, had 27%. Its valuation is £22bn — only £5bn more than Ocado. 

Considering the above, I’m still giving Ocado shares a wide berth as an investor. For me, there are far better opportunities elsewhere in the market. The bubble may finally be bursting.

The post Ocado shares are falling today. Is this FTSE 100 firm’s bubble finally bursting? appeared first on The Motley Fool UK.

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Paul Summers 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.

Joint venture with Ocado

In February 2019, M&S and Ocado entered a joint venture agreement whereby M&S bought a 50% share of Ocado’s UK retail business for up to £750m. This gave the retailer a full online food delivery service to help modernise the company. Even so, last year, the news was met with a largely negative response. This was due to the dividend being cut by 40% in order to help fund the deal and the fact that the company had to issue more shares.

Nonetheless, M&S products have been available on Ocado since the start of this month and there have been signs of promise. In fact, an Ocado spokesperson stated that “the M&S launch has been incredibly popular”. It’s also been noted that shoppers have been buying more M&S products than they did Waitrose products. As such, although many observers do still remain sceptical, this could bode very well for M&S shares.

Problems that remain

Despite this promise in the food sector, there are plenty of other problems in the rest of the business. For example, the Clothing & Home unit has struggled for many years, and has further declined this year. In fact, so far this year, overall sales in this department have fallen nearly 50%. 

There are a number of reasons for this disappointment. Firstly, its lacklustre online presence has allowed other fashion retailers to increase their market shares at the expense of M&S. This has included online retailers Boohoo and Asos. By buying stock very far in advance of a season, M&S has also struggled to react to trends, and this has meant that excess stock has to be heavily marked down. It has also led to significantly reduced profits. This faltering side of the business has therefore placed a major strain on M&S shares over the past few years, and evidently, there are a number of issues that need to be addressed.

Would I buy M&S shares?

In terms of addressing these issues, the retailer has made small steps. For example, it has made the necessary step of cutting 7,000 jobs. Although this is not good news for the workers involved, these streamlining efforts should allow the business to increase its longevity. The joint venture with Ocado is also a sign that the company is attempting to modernise.

Despite this, I’m still not buying. Although M&S shares are certainly cheap in the short-to-medium-term, I’m sceptical regarding the long-term future of the company. The current difficult economic climate should make the task of restoring the retailer to its former glory especially hard, and this means that the upside does seem limited. Instead, I’d prefer to buy a stock with better growth prospects.

The post After its joint venture with Ocado, are M&S shares a buy? appeared first on The Motley Fool UK.

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Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has recommended ASOS and boohoo group. 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.