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As a value and income investor, I buy shares that seem undervalued and/or offer generous dividend yields. However, I love being part-owner of really great businesses, so my family portfolio also owns various US tech and mega-cap stocks. But when I look at the Ocado Group (LSE: OCDO) share price, I feel like I dodged a bullet.
What a comeback
This grocery technology and logistics company has had a chequered history since joining the London stock market. Floated at 180p a share in July 2010, this stock soon started sliding southwards. At its all-time low, the Ocado share price touched 52.1p in December 2011.
However, going back five years or so to the Covid-19 pandemic of 2020/21, Ocado shares were riding wildly high. At their record, they peaked at 2,914p on 30 September 2020. Thus, investors who bought at the 2011 low and sold at the 2020 high would have made almost 56 times their money in under nine years. Wow.
Oh no, Ocado
Throughout 2020 to 2023, I repeatedly warned readers that I viewed Ocado shares as far too richly valued. In my view, they were priced for perfection and could only go one way — steeply downwards. It gives me no pleasure to be right, because long-suffering shareholders have lost many billions of pounds.
As I write, Ocado shares trade at 186.4p, valuing the group at under £1.6bn. Once valued at over £20bn and a proud member of the elite FTSE 100 index, this stock now resides in the mid-cap FTSE 250 index. Why? Because the share price has plunged 29.4% over six months and 42.7% over one year. Over five years, the stock has collapsed by 91.6% and is currently down 93.6% from its record high.
What’s more, this FTSE 250 stock has never paid a dividend, so the company has never returned any cash to its shareholder owners.
Hero or zero?
Nearly 40 years of investing has taught me that shares that have slumped by, say, 95% can keep falling until they reach zero. Then again, history has also shown that some falling knives are actually fallen angels that get resurrected to glory. Alas, I’ve no sure-fire way of identifying exactly which is which!
Ocado’s latest problem was revealed earlier this month, when US supermarket partner Kroger decided to scale back their partnership. Kroger is to close three automated distribution centres it operates with Ocado. This will cut $50m from Ocado’s revenues in this financial year, offset by $250m in compensation. (Kroger also scrapped three warehouses in 2024.)
Ocado’s big problem seems to be the huge upfront investment required to fill warehouses with advanced robots to pick, pack, and move groceries. Hence, centres need to operate at near-maximum capacity. Despite this, Ocado has ongoing partnerships with Wm Morrison in the UK, Coles in Australia, and Sobeys in Canada.
Summing up, Ocado has great technology, but a problematic and so-far unprofitable business model. If it were to get into serious trouble, I suspect its core assets would be bought by a powerful US or global rival in the tech or grocery markets. And that’s why I believe there is some hidden value in this stock. However, I prefer to seek my returns elsewhere…