Ocado PLC (LON:OCDO) has long been a battleground for short-sellers, with the online grocer which is transforming itself into more of a technology play, something of a Marmite stock – you either love it or hate it.
Following a third-quarter trading update today from the FTSE 100-listed group – which was promoted to the bluechip echelon earlier this year – its shares rose by around 1.5%, but while the bulls held sway, the bears still remain very much in evidence.
READ: Ocado shares gain as third-quarter revenue rises 11.5%
In comment on Tuesday, Russ Mould, investment director at AJ Bell said: “The battle lines are still drawn between those who see Ocado as an online grocer that will struggle to ever earn enough profit or generate enough cash to justify its £6bn-plus market capitalisation and those who see it as a technology company, licensing out its logistics expertise to firms that wish to improve their own online offering,”
He noted that the bulls have won the argument hands down over the past year, since Ocado’s shares have surged from 305p to 946p, helped by technology platform licensing deals in France, Sweden, Canada and America.
Mould added: “Those wins helped to create a huge short squeeze in the shares, as bears felt obliged to buy back the stock they had borrowed and sold and return them to their original owners as the shares –and their losses – rose.”
“That buying took the shares higher still, forcing yet more sceptics to throw in the towel, creating more buying and so on, in a vicious circle for short-sellers and a virtuous one for long-term shareholders,” he continued.
Short-selling squeeze over?
Mould thinks that the short-selling squeeze now looks to be over, with data from www.shorttrackers.co.uk suggesting that only 1.4% of Ocado’s shares had been sold short, according to regulatory disclosures, in early August, down from more than 21% in summer 2016.
However, the investment director noted that two hedge funds - GMT Capital and Marshall Wace - both appear to be testing the waters once more, by going short again, possibly encouraged by the absence of any major shorts, Ocado’s even loftier valuation, and recent sales of shares by senior Ocado executives worth more than £100mln.
“Whatever the reason, Ocado’s shares have dipped back below £10 and today’s third-quarter results are unlikely to change the minds of either supporters or sceptics, as retail sales growth, average order growth and average basket size all stuck to recent trends,” Mould added.
“These figures are clearly enough to please fans of the stock, since the shares are up today, but in the long run sceptics will want to see how Ocado can turn its licensing deals and grocery deliveries into profits and cash flow if they are to finally decide they are better off leaving the company alone and find other short-selling targets.”