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Brodie: Why investors shouldn’t write off Ocado

15 May 2014

It is one of the most contentious stocks among investors, having failed to return a profit in any of its 14 years of trading, but Douglas Brodie has made a conviction play on the online grocery retailer in his fund and investment trust.

By Daniel Lanyon,

Reporter, FE Trustnet

Ocado is an attractive stock despite a high valuation and recent sharp falls, according to FE Alpha Manager Douglas Brodie, who says it could end up as a competitor to Amazon.

Ocado’s share price soared throughout 2013 as internet-based stocks became highly sought-after and it announced the signing of an agreement to distribute the produce of budget supermarket Morrisons, but the share price crashed in March as tech stocks sold off.

However Brodie is retaining it as one of the biggest positions in his open- and closed-ended portfolios, and says the company could end up being one of the global giants of the future.

“Grocery is the one product that has struggled to move online because of the complexities involved in doing it and why Amazon has shied away from it,” he said.

“Sending out 80 different items at three different temperatures is a lot harder than sending out a couple of books.”

“If you're delivering to a house every week it doesn't hurt to slip in a book or something else non-grocery because you are doing the delivery anyway.”

“It is not just UK relevant it has huge relevance to other overseas markets. The UK is at the forefront but it is still only 4/5 per cent of the grocery market and that is the world leader.”

Between March 2013 and March 2014 Ocado rose 369 per cent but has since fallen after it was hit by a sell-off in tech stocks at the begging of March. Since March 5 it has fallen 43.33 percent.

Performance of stock since 5 March

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Source: FE Analytics


In Brodie’s £149.3m Baillie Gifford Global Discovery fund it is the largest holding, making up 3 per cent of the fund, while in the £213.3m Edinburgh Worldwide investment trust it is the second largest holding with 3.1 per cent invested.

Brodie says the company could become a world leader in online retailing and is therefore maintaining his conviction positions in the company.

“All good ideas start small and so you need to identify and buy them early and then hold them,” he said.

“There is an awful lot of commentary asking how we could buy a company that is on a 100 times P/E ratio.”

However, Brodie says his conviction positions in Ocado are part of a wider investment style directing both the fund and trust that seeks to buy smaller companies that are leading disruption to an established market.

“When you start getting companies that are doing things both better and cheaper you then have a proposition that is ripe for distribution, if you also have a stale incumbent that does not think change can happen in its market place,” he said.


“If you step back and think about the progress this company is making in putting itself at the forefront of disruption to the global grocery market, it starts to look very attractive.”

“Ultimately, what it is doing is globally relevant and as grocery makes up 50 per cent of all retail, this is possibly one of the biggest pies in the world to be in and to be trying to disrupt.”

“We are confident that their proposition is very good and that there are tantalizing glimpses as to how good it could be; that is why it is at an attractive value.”

“From a market cap perspective, given the size of the pie it is trying to disrupt, £2bn is a low market capitalisation.”

Ocado’s fall, alongside other tech stocks in the tech-heavy Edinburgh Worldwide investment trust have contributed to a recent drop in performance.

It has returned 18.74 per cent over three years, falling short of its IT Global sector average of 21.26 per cent. However, before the sell-off in tech stocks in March it had returned more than 45 per cent, from the same date.

Performance of trust and sector over 3yrs

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Source: FE Analytics


The Baillie Gifford Global Discovery fund was similarly hit by falls in Ocado and other tech stocks since the beginning of March.

It has returned 40.05 per cent over three years, more than double its IMA Global sector average of 19.95 per cent. However, it had returned more than 65 per cent before the tech sell-off, from the same date.

Performance of fund and sector over 3yrs

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Source: FE Analytics



Six other funds hold Ocado as a top ten holding including two further Baillie Gifford funds: Baillie Gifford Smaller Companies and Baillie Gifford UK Equity Alpha which have 2.4 per cent and 4 per cent, respectively.

Other funds are Fidelity International and Fidelity UK Growth, L&G UK Absolute and CF Absolute.

No other investment trusts hold Ocado as a top ten holding.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.