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Stock market rally: should I sell overpriced Ocado shares to buy dirt-cheap Cineworld?

Harvey Jones
·3-min read
Dice engraved with the words buy and sell, possibly in FTSE 100
Dice engraved with the words buy and sell, possibly in FTSE 100

The stock market rally has turned the investment world upside down. Lockdown winners are falling, while lockdown losers are soaring. This poses a challenge for investors like me. Should I dive into fast-recovering FTSE 100 sectors such as airlines, cruise operators, pub chains and hotels, or buy fallen heroes such as tech stocks and food delivery firms?

Or, to put it another way, is the stock market rally the ideal time to buy beleaguered cinema chain Cineworld Group (LSE: CINE) and sell food delivery specialist Ocado Group (LSE: OCDO)? Or the other way around?

Measured over 12 months, the performance of these two stocks couldn’t be more different. The Cineworld share price has lost three quarters of its value, while the Ocado share price has doubled. However, since Pfizer announced its vaccine breakthrough on 9 November, they’ve streaked off in completely opposite directions.

Ocado and Cineworld are so different right now

Cineworld has outpaced the wider stock market rally, its share price rising 62% since the Pfizer announcement. By contrast, Ocado has fallen 10%.

Today’s valuations are extremely different, despite the stock market rally. Cineworld is still dirt cheap, with a price-to-revenue ratio of 0.2 and price-to-book value of 0.3. By contrast, Ocado’s numbers stand at 9.9 and 16.5 respectively. While these figures aren’t entirely comparative, I think they give us a fair idea of how cheap Cineworld is, and how expensive Ocado has become.

I’m certainly wary of buying Ocado, even though home food deliveries are rising again in lockdown 2.0, and Christmas is coming fast. I’m more concerned about 2021. If that vaccine works, people will rush out to enjoy the luxury of dining in actual restaurants. The demand’s there, just look at the success of Eat Out to Help Out.

Ocado has offered a double blow lately, as new figures show rival Waitrose eating away at sales, while it’s being sued by Norwegian rival AutoStore for a warehouse technology patent breach. Its shares are up 850% in the last three years, and that level of success is hard to replicate.

If the stock market rally continues, Ocado could miss out. It still has plenty to offer, especially with its M&S joint venture showing strong trading. But I’d rather bank profits than buy today.

Cineworld is soaring on hopes that a vaccine will make people feel comfortable watching a big screen in a darkened room with hundreds of their fellow citizens. My worry is that the damage has already been done, as the cinema chain has run up an $8bn debt pile due to Covid-19.

Stock market rally may not be enough

Management is now doing all it can to stay solvent until the spring, when it hopes for a double shot in the arm from the vaccine and a fresh stream of blockbusters. It’ll be touch and go. I can foresee a time when cinema goers are queueing round the block to see the long-delayed James Bond film, but there’ll be some anxious times before then.

My worry is that Cineworld will be a greatly weakened operation, with fewer screens and audiences used to streaming at home. Right now, both stocks are too risky for me, although in very different ways. I’m now looking for better ways to play the stock market rally.

The post Stock market rally: should I sell overpriced Ocado shares to buy dirt-cheap Cineworld? 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 2020