People will always dream of getting rich quick and frankly, I don’t blame them. Who wouldn’t want to win a few million on the National Lottery? And who didn’t feel a frisson of excitement when some overexcited ‘analyst’ said Bitcoin could hit $1m?
Dreams of avarice
There is only one problem with trying to get rich quick this way. You almost certainly won’t. I’m not going to pretend you will become a millionaire by purchasing shares in online grocer Ocado Group (LSE: OCDO) either. However, stocks like these can play a key role in achieving a more realistic goal – getting rich slowly. You need to be patient, but it could prove far more rewarding in the end.
If you build a balanced portfolio you aren’t relying on luck, as with the Lottery, or a long shot, as with Bitcoin. You just need to pick a balanced blend of shares, reinvest your dividends for long-term growth, and leave them to grow for years, ideally decades.
How much?
So should Ocado be part of that portfolio? It has certainly displayed get-rich-quick qualities, soaring 461% in the last two years alone. If you hold it in your portfolio, you should be feeling pretty dandy today.
Incredibly, that momentum has continued despite the growing number of doomsayers, rising another 30% in the last month alone. Do you like momentum stocks? Well this is the fastest on the FTSE 100. Its market cap is now heading towards £10bn.
This is where the worries start to creep in. It’s easier for a £1bn company to double in value than a £10bn operation. The chances of it rising another 461% in the next two years are close to zero.
Head for heights
The other danger is that faster growth usually comes with a flighty valuation. Investors are buying Ocado’s potential future revenues, rather than today’s reality. The result is that the stock trades at 5.4 times revenues, when a figure closer to 1 is thought to be about right.
That revenue is growing, though. Up 11.2% to £404m in the 13 weeks to 3 March. Ocado will also generate some cash from its new 50/50 joint food delivery venture with Marks and Spencer Group, which will stump up £750m for its share.
British tech hero
Some investors still view Ocado as a UK grocer when that part of the business is now tiny, with annual sales of about £1.4bn. In comparison, Tesco is aiming for around £65bn. Ocado is a global technology group specialising in running automated warehouses and online grocery delivery. Future revenues will come from striking logistics agreements with major global retailers, which now include American grocery giant Kroger, Groupe Casino in France, Sobeys in Canada, ICA Group in Sweden and latest hook-up Australian retail group Coles.
This rapid growth is enticing but it does make the stock difficult to value, as this is all in the future. This expansion also requires massive investment and it could be a long time before Ocado turns a profit. With its shares close to a year high, Ocado may be too risky at this price, even though I’d still choose it over the lottery or Bitcoin. It might be wiser to spread your money across these three dividend stocks instead, and get rich slowly that way.