The FTSE 100 slump over the past month has been well documented, and has seen all of the 100 constituents give a negative return. The best performing firm over this period has been Ocado (LSE: OCDO). When I say the ‘best’ performer, do note that even Ocado is down month-on-month. But if we look at it on an absolute basis, it has only lost around 2% in value.
If we compare this to the average (around a 27% loss) you can see that Ocado has outperformed its peers quite substantially. And looking at it in a little more detail, it seems this trend has a very good chance of continuing.
Ocado is a tech firm-cum-online grocer that went public a decade ago. Since then, the business has grown into producing food products via an own brand. It also white labels storage and distribution facilities for other supermarket chains. It has been investing further in technology in recent years, focusing on concepts such as automated warehouses, robots and machine learning for online fraud prevention.
Ocado has been a top performer on the stock market for a while. In fact, if you had bought the stock two years ago, you would have almost doubled your money by now. But why is it the top performer over the past month during an extreme market sell-off and despite making a pre-tax loss last year?
Defensive play
The main catalyst for the recent sell-off can be put down mainly to the coronavirus. So if you were a fund manager who has a mandate to give investors a positive return on investment, what sectors would you focus on buying (or selling)?
The obvious buys are defensive stocks that traditionally perform well during a downturn. These include consumer staples such as supermarkets. We are all still going to need to buy food and drink however bad a situation gets. And the weekend’s panic-buying shows we’ll even buy more than usual in tough times. The added plus for online-based Ocado in this sell-off is that many worry about interacting with other people and catching the virus.Â
So while supermarkets are performing well on a relative basis (i.e not falling as much as others) Ocado is the pick of the bunch because it is purely online. This means clients can order from homes and get delivery to the front door, all without risking leaving home. So while it is too early to call, I would expect revenue for Ocado to be surging at the moment.
Indirect influence
Secondly, Ocado has a lot of indirect influence on distribution and warehousing for other firms in the industry. This will be benefiting it at the moment. For example, Morrisons use Ocado for delivery and storage services. Morrisons itself will be seeing an increase in demand (pictures of empty shelves are plentiful). Ocado is indirectly benefiting from this due to the services it provides in the back office.
So would I buy Ocado right now? Yes I would. Not only is it likely to be a top performer during this difficult period, but strip that away and you have an already-growing business with expanding operations.