Interactive Investor

Insider: directors and analysts both buyers of these shares at multi-year low

16th May 2022 07:58

Graeme Evans from interactive investor

This year has not been kind to these two stocks, which just traded at their lowest prices in years. But this was the trigger for hefty buying by the people who should know best. 

A 20% plunge for Ocado Group (LSE:OCDO) shares during May’s tech sector sell-off has created a £200,000 buying opportunity for the company’s chairman and the head of its technology arm.

Former Invensys boss Rick Haythornthwaite, who has led the board of Ocado since January 2021, spent £100,000 on the grocery warehouse automation company’s shares a week ago at a price of 794p.

James Matthews, who as chief executive of Ocado Technology leads a 2,500-strong team of “technologists” in 11 development centres, followed on Tuesday with a purchase worth £87,000 at 793p.

The paper value of their investments quickly deteriorated as investors dumped growth and tech stocks due to recession and rate rise fears triggered by persistent US inflation.

Ocado hit a low of 697p on Thursday afternoon, meaning it had lost more than 20% of value in the first eight trading sessions of May.

A 4% rally on Friday ensured the FTSE 100-listed stock closed a wild week at 802.8p, some 200p below its level prior to the pandemic. It was more than 1,500p at the start of the year and above 2,800p at the height of the online shopping boom in January 2021.

Away from recent market gyrations, Ocado continues to be a stock whose valuation divides opinion more than most. Ongoing investment costs mean its annual loss came to £176.9 million in 2021, with more red ink expected in future financial years.

But its supporters see the longer-term potential of a market leader well placed to take advantage of an estimated $94 billion (£76.8 million) expansion of the global online grocery sector in the next five years.

It now has six customer fulfilment centres (CFC) in the UK and partnerships with some of the world's largest food retailers, including The Kroger Co (NYSE:KR) in the United States, Sobeys in Canada and Casino in France.

The rollout of its software and CFC estate is accelerating after its live sites doubled to 10 in 2021 following Kroger launches in Ohio and Florida. Ocado’s plan is to open a further nine this year, including six in the US and one in each of Sweden, Canada and the UK.

In March, analysts at Bernstein described the CFCs as “cash generating machines” and estimated that each one was worth £179 million. It said Ocado’s then market capitalisation of  £8 billion only priced in 45 CFCs, the number expected in six years’ time.

Bernstein, which expects 31 international CFCs within three years, had a target price at the time of 2,110p, adding: “We think Ocado has been unfairly punished by the inflationary risk and rising yields concerns, given the inflation protection clause for the International Solution business and lower exposure to trading down risk in the UK retail business.”

The original Ocado.com business, which launched over 20 years ago and is now a 50:50 joint venture with Marks & Spencer Group (LSE:MKS), accounted for 92% of 2021’s £2.5 billion of group revenues and is experiencing toughening conditions as pandemic basket sizes start to normalise.

Amid cost of living pressures, the Retail arm’s management recently lowered this year’s revenues guidance to “closer to 10%” from mid-teens growth. Sales were 6% lower in the first quarter but this still represented growth of 32% against the same quarter before Covid.

Other potential downsides flagged by Bernstein in its recent note include patent litigation and the potential need to raise cash likely via debt in 2022/23.

The start of a rebound?

In the FTSE 250, the buying of £50,000 of shares by Victrex (LSE:VCT) chief executive Jakob Sigurdsson contributed to an end-of-week rebound for the polymer solutions business.

A lacklustre market reaction to Monday’s strong interim results left shares as low as 1,603p, until Friday’s revival pushed Victrex back up to 1,702p by the end of the week.

Sigurdsson, who was appointed to the board in October 2017, bought his 3,000 shares at a price of 1,645p on Thursday.

Earlier in the week he reported a 3% rise in underlying profits to £48.2 million, aided by good progress in the medical business as elective surgeries have returned in greater numbers. Products or applications which contain Victrex sustainable polymers are also found in smartphones, planes, cars and oil and gas operations.

He said: “On a medium to long term basis, Victrex remains well placed, with a broad range of growth opportunities, a strong ESG agenda and a highly cash generative business model."

Despite this optimism, investor confidence continues to be swayed by a second half gross margin expected to be slightly lower due to inflationary pressures.

On Friday, Peel Hunt left its “buy” recommendation and target price of 2,860p unchanged. The broker described the direction of travel as positive, noting that shares were trading on 15.6 times 2023 earnings forecasts.

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