Just like buses, weary investors in Ocado have been waiting for years for the online supermarket to announce a major international tie-up, and the deals have all come along at once.
Last week’s huge deal with US giant Kroger was the fourth in six months, following similar tie-ups with France’s Groupe Casino (CASP.PA), Canada’s Sobeys and Sweden’s ICA Group (ICAA.ST). The shares have rallied 250% over that period, eclipsing all others in the FTSE All-Share.
‘In the last six months, everything has come together,’ said James Zimmerman, who bought the stock in one of his first acts when taking over the running of the Jupiter UK Smaller Companies fund nearly three years ago.
Ocado was his fourth largest holding, representing 2.8% of the portfolio, before Thursday’s news sent the shares 54% higher.
For Zimmerman, the last six months have vindicated his patience with the stock, which had ranked among the most shorted on the stock market as it continually failed to deliver on its own promises to land a major international deal.
Having pledged to deliver a deal by the end of 2015, it wasn’t until June last year that one was announced, a partnership with an unnamed regional retailer that failed to set the shares alight.
But any disappointment was forgotten when Ocado surprised investors with the Groupe Casino agreement at the end of last year.
It was the first major deal since Ocado’s tie-up with Morrisons (MRW) in 2013, to add to its longstanding deal with Waitrose.
In the intervening period there had been little to cheer investors, with that deal undermined by Morrisons’ inking of an agreement with e-commerce giant Amazon (AMZN.O) in 2016.
Even Zimmerman’s confidence had been dented, with the manager selling just over a quarter of his shares in the second half of last year, as costs began to weigh.
‘It’s been quite wearying owning this one,’ he said. ‘It had taken a long time for them to sign their first licensing deal. I remained confident they would, but the balance sheet was deteriorating, and I personally get very nervous when that happens.’
The manager quickly replenished his holding when the first deal was announced, and was rewarded by the flurry of deals that followed. But he is in no doubt that last week’s announcement was the pivotal deal.
‘This is an order of magnitude bigger than the others,’ he said, pointing to Kroger’s 2017 revenues of $122.7 billion (£91.3 billion). It would not take a lot of those revenues to move to the supermarket’s Ocado-powered online proposition for the tie-up to have a big impact.
‘Who’s to say what percentage of sales will be online?’ said Zimmerman, adding that a strong online proposition could generate further demand.
‘No-one has a technology that’s as evolved and holistic a process as Ocado,’ he said. ‘With Ocado, we’re just learning some of the ways they can monetise something that’s the product of tremendous iterations.’
‘Ocado has been a relatively high volatility name in the fund over the last few years, but I maintained conviction in it given its industry-leading technology, and the size of its addressable market,’ he said.
Unlike some who saw Amazon’s move into the grocery market with its acquisition of Whole Foods as a threat to Ocado, Sohn saw opportunities.
‘We thought that Amazon’s entry into the food retail market would force traditional stores to become more efficient in order to see off online competition from Amazon,’ he said. ‘Use of Ocado’s technology would be a significant means to achieving these efficiency gains.’
Luke Ward, deputy manager on the £441 million Edinburgh Worldwide (EWI) investment trust and £394 million Baillie Gifford Global Discovery funds, which both house Ocado in their top five stocks, also hailed the Kroger deal.
‘This is positive for Ocado, a larger deal than any they have signed before, and a welcome endorsement of the model they have been pursuing for several years now,’ he said.