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Should I chase the Ocado share price higher or listen to Warren Buffet and buy a tracker instead?

Harvey Jones
·4-min read
Portrait of worried woman standing beside window
Portrait of worried woman standing beside window

The Ocado Group (LSE: OCD) share price has been a thing of wonder in the pandemic, doubling in the last 12 months. Its performance over five years is even more spectacular, as it rose 854% in that time.

The FTSE 100 has limped behind. Despite a strong recovery from the post-crash lows of last March, it trades more than 13% lower than a year ago. Its long-term performance also trails the Ocado share price. Over five years, it’s up just 14.5%.

If I’d invested £10,000 in Ocado five years ago, I’d have £95,400 today. By contrast, a FTSE 100 tracker would have turned £10,000 into just £11,450. With dividends reinvested, I might have £13,000. The Ocado share price is the clear winner. However, past performance is no guarantee of future success. There is a danger the buzz around Ocado has been overdone. And the stock trades at an incredibly high price-to-book value of 18.9.

The FTSE 100 could rebound

While individual equities can beat the index, working out which companies will repeat the Ocado share price’s blistering performance is never easy. Stock pickers like me will buy losers as well as winners.

US billionaire investor Warren Buffett, possibly the most successful stock picker of all, recognises that. He has instructed trustees in charge of his estate to invest 90% in the S&P 500, via index trackers, for when he’s gone. I could apply the same logic to the FTSE 100.

Buying a low-cost exchange-traded fund or unit trust tracker is as simple as can be. I potentially get growth across the index, at minimal cost. History shows that in the long run, my index tracker should beat almost every other asset class.

However, I still think there’s a strong case for me to invest in individual stocks as well, as long as I understand the risks. The Ocado share price shows that. Would I buy it today?

Ocado is a tech-based company. It has built delivery infrastructure for supermarkets that it can sell worldwide. It has poured money into robotics technology, which is why it has only posted pre-tax profit twice since its creation 20 years ago.

I think the Ocado share price could climb

Its plans seem to be coming to fruition, as the surge in online food shopping during lockdowns drives underlying profits. Full-year profits at the Ocado Retail division, which started selling Marks & Spencer food last September, are expected to top £60m, up from the £40m originally anticipated. This was before the third lockdown was announced.

Ocado is now looking to expand into clothing and general merchandise, after buying two US-based robot developers. The bots will pick and pack goods for home delivery. Once it has refined the technology, it can offer its services all over the world. The Ocado share price is up another 20% in the past month in anticipation.

However, as I said, it is expensive. The stock is priced for rapid global growth and any setbacks could hit it hard. I mustn’t ignore the dangers.

I think FTSE trackers make a good core portfolio holding, but a few top stocks like Ocado can supplement that nicely. I’m aware that Ocado isn’t consistently profitable and I don’t know what will happen to the share price in future (it can fall or tread water as well as rise). But I’d still buy today.

The post Should I chase the Ocado share price higher or listen to Warren Buffet and buy a tracker instead? appeared first on The Motley Fool UK.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2021