The FTSE 100 enjoyed a strong rally last week. A ‘Biden bounce’, along with news about a Covid-19 vaccine, meant that the index gained over 400 points. Individual share prices were more mixed than the index, meaning there were some losers from it all. The Ocado (LSE:OCDO) share price fell 10.65%, the second worst performer after Fresnillo. Given the good news that came out during the week, it raises the question as to why Ocado was sold off when most other stocks were bought.
Not all news is good news
The main driver for the move lower was the news about a vaccine that is currently in trial. Reports that it has effectiveness of 90% are a great sign for humanity, as well as corporates. The ability for many businesses to look to next year with optimism about higher sales and footfall is fantastic.
Yet for Ocado, this isn’t all good news. The Ocado share price surged in late Q1 and Q2, due to the increase in demand from lockdown orders. The ability of Ocado to effectively distribute orders and have a well run online platform ensured it was best placed to cater to the high demand. If the vaccine is truly effective and consumers are comfortable to go back to shopping in-store, Ocado would see a fall in orders. This is natural to assume, and although it would likely still beat the levels seen pre-pandemic, it probably wouldn’t be as high as it experienced for much of this year.
The net impact of all of this would be analysts revising their financial expectations for Ocado downwards. This would likely see the Ocado share price continue to move lower, I feel. Indeed, the 10% drop last week was partly from investors thinking ahead and selling to preempt a fall.
An Ocado share price correction
I don’t actually think the fall in the Ocado share price is a bad thing though. Only last week I wrote about how I thought the stock was overvalued at current levels, with a massive market capitalisation of around £19.3bn. When compared to the market leader (Tesco), this seemed very high. So the slump in the share price also brings down the market cap, putting it closer to a fair value.
In my opinion, the Ocado share price could have further to fall. The share price has almost doubled in value this year. I think a correction of 10%-20% is healthy after such a rally. The business is sound, and will continue to have a strong core customer base. Even though I wouldn’t buy the stock at current levels, if I already owned it, I wouldn’t be in a hurry to sell. After all, at the Motley Fool we strive for long-term investing!
The post Why I think the Ocado share price fell 10% last week, despite the FTSE 100 surge appeared first on The Motley Fool UK.
jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has recommended Fresnillo and Tesco. 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