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Small cap stars buoyed by Ocado's surge on US deal

Shares in Ocado soar 43% after online supermarket signs deal with US giant Kroger, providing further boost to star fund manager backers.

 
Small cap stars buoyed by Ocado's surge on US deal
 

Shares in Ocado (OCDO) have rocketed after the online supermarket signed a deal to become the exclusive partner of US giant Kroger (KR.N).

The shares jumped 43% to 789.4p on news of the tie-up with the largest supermarket chain in the US, Ocado's fourth international deal with a supermarket in the last six months.

Ocado chief executive Tim Steiner said the deal would be 'transformative' for the business.

'The opportunity to partner with Kroger to transform the way in which US customers buy grocery represents a huge opportunity to redefine the grocery experience of Kroger's customers and create value for the stakeholders of both Kroger and Ocado,' he said.

Shares in Ocado are up by more than 250% over the last six months, as the company has finally delivered on expectations of an international expansion.

November's announcement of a deal with France's Groupe Casino (CASP.PA) set the shares on their way, and was followed by a tie-up with Canada's Sobeys and Sweden's ICA Group (ICAA.ST).

'After years of starving investors of the international deal they so desperately craved, Ocado has been rattling off transformational tie-ups at an astonishing rate in the last few months,' said Connor Campbell, financial analyst at Spreadex.

Boost for backers

Today's share price surge has handed another boost to two star small company fund managers who have been enthusiastic backers of the stock.

Ocado is a top five holding in Douglas Brodie's (pictured) £441 million Edinburgh Worldwide (EWI ) investment trust and £394 million Baillie Gifford Global Discovery fund, representing 2.6% and 2.9% of the respective portfolios.

Edinburgh Worldwide is the top-performing global smaller companies investment trust over the last three years, with the shares up 86%, while the Global Discovery fund has returned 55% over three years to the end of April, placing it third in its Citywire sector.

James Zimmerman, the best performing manager in Citywire's UK Smaller Companies sector over the last year, holds 2.8% of his £297 million Jupiter UK Smaller Companies fund in Ocado, his third largest position.

Other fund managers to have bet big on Ocado include Amit Lodha, manager of the £421 million Fidelity Global Focus fund, and Citywire AA-rated Henry Boucher, who runs the £163 million Sarasin Food & Agriculture Opportunities fund.

Analysts hail deal

'This is a big deal,' said Numis analyst Andrew Wade, who rates the shares a 'buy'. 'This is clearly a transformative deal for Ocado, and one that is on a completely different scale to those announced in the past.'

Analysts said e-commerce giant Amazon's (AMZN.O) move into the grocery space with its takeover of Whole Foods was the likely catalyst.

'Amazon has indeed fuelled a US Ocado deal,' said Peel Hunt analyst James Lockyer, who rates the shares a 'buy' and placed his target price under review.

'We are sure that the deal announced today is a step change,' he said. 'Moreover, some of the nuances of this deal in particular give us a feeling that the tables have turned and Ocado now has the supplier power.'

He pointed to the 5% stake Kroger will take in Ocado under the deal, and the plans for up to 20 distribution centres in the first three years of the agreement.

Jefferies analyst James Grzinic, who rates the shares a 'hold' said those terms represented 'the strongest endorsement that Ocado could have delivered to investors'.

'We can only applaud Ocado's success in engaging with the most attractive counterpart in the biggest potential market for online food.'

Short-sellers squeezed

Short-sellers rushing out of their positions are also likely to have contributed to the magnitude of today's share price rise, and the rally over the last six months.

Around 7.2% of the company's shares are being 'shorted', where investors are betting on the price falling, although this is down from a peak of 21% in the summer of 2016, according to data from Short Tracker.

Financial Conduct Authority data shows the following fund groups as short shares in the online supermarket:

Fund group % of shares short
GMT Capital Corp 1.89
Kairos Investment Management Limited 1.51
Marshall Wace LLP 1
Parvus Asset Management Europe Limited 0.86
Hunt Lane Capital LP 0.72
BlackRock Institutional Trust Company, National Association 0.6
UBS Asset Management (UK) Ltd 0.59

'As one of the most shorted stocks in the UK stock market, this deal will be a poke in the eye for the hedge funds who have bet against Ocado because of its eye-watering valuation,' said Laith Khalaf, senior analyst at Hargreaves Lansdown.

'The short sellers were hoping Ocado wouldn't deliver on its international expansion plans, that position now looks like a badly busted flush.'

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