What Ocado’s big bounce should teach equity investors

By: Tim Bennett

What Ocado’s big bounce should teach equity investors

Last week the online grocer, Ocado, a stock that had been on a fairly uninspiring share price trajectory for some years, sprang a big surprise that saw the share price jump by 45% in a day. Now that the dust has settled a bit, Tim Bennett revisits three timeless investing lessons that this sort of episode throws into stark relief.

What happened?

The cause of a sudden spike in the Ocado share price was the announcement that US food giant Kroger had agreed to buy a 5% stake in the business. This was a far bigger deal than previous ones with non-UK retailers and a clear marker of intent from one of the world’s biggest grocery firms. The impact on the share price was immediate and impressive as the chart below shows;
Although such a rise might seem, at first glance, like unalloyed good news, there are a few warnings for investors in other shares buried behind the buzz that surrounded this deal. Here are three.

Never focus on single stocks

Although it can seems tempting to do so when a good story like this gets out, owning single stocks in isolation is a bad idea. Although Ocado soared last week, it would have taken a huge dose of luck to get the timing right and buy just ahead of the 45% surge. Worse, as shareholders in the likes of BP, Tesco and G4S will attest, when things go wrong at the single stock level they can go so spectacularly.

That is why we recommend diversifying a portfolio across at least 15-25 names, taking sector, geography and stock type into account. You don’t need hundreds, as the chart below shows, but you do need a sensible spread. An Investment Manager will be able to discuss this further if you would like to know more.

Sentiment can shift quickly

It is sometimes easy to forget that there are two sides to every story. Although Ocado had been criticised by many analysts for years, clearly US giants such as Amazon and Kroger see big value in it. Investors would do well to remember that confirmation bias, a tendency to look for facts that fit your preconceptions about a stock, can be dangerous especially if it leave you oblivious to changing circumstances.

Shorting is for the brave or the foolish

Ocado was a reminder that people who bet on falling share prices take a big risk in doing so. The potential downside from shorting a stock is technically unlimited. The process is summarised on the following two slides and my conclusion is simple – shorting should be left to the professionals, who, in the case of Ocado, can get it badly wrong just like anyone else.

If you would like to discuss any of the points here in more detail, or raise any questions, please email me at [email protected]