Image source: Getty Images
When I see a FTSE 250 stock rise by 30% in just over two weeks, I take notice.
After all, companies listed in the UK’s mid-cap index are generally fairly large and well established. If their share prices suddenly shoot up, it’s often a sign of strong trading and upgraded profit forecasts.
The top FTSE 250 riser in July (so far!)
Ocado (LSE: OCDO) is a good example. The retail technology specialist’s share price rose by around 10% on Tuesday 16 July, after the company said it expects to generate more underlying cash flow than expected this year (before various expenses).
Ocado shares are now up by 30% so far in July at the time of writing, making it the index’s best performer this month.
The shares are still a long way below their pandemic high. But to me, it looks like things might now be moving in the right direction for Ocado.
Should I consider buying some shares now, ahead of any possible further gains? Let’s take a look.
Why I’m interested
I like investing in FTSE 250 companies. Many of the shares in my main personal portfolio are members of the mid-cap index. I like them because they are small enough to grow, but large enough to be proven, profitable businesses.
Ocado ticks almost all of these boxes. It was founded in Hatfield, north of London, in 2000. Today, it has customer operations in Asia, North America, and Europe, as well as the UK.
The company’s automated warehouses and robotic picking systems are very clever. We know they work, partly because the company also uses its own technology to run a grocery delivery business in the UK, in partnership with Marks & Spencer.
Ocado now has a growing customer base of other retailers who pay to use its technology.
Founder and CEO Tim Steiner believes that selling this technology to other retailers will be very profitable one day.
However, that day hasn’t come yet. Although Ocado’s annual turnover is expected to hit £3bn this year, the company has never made a meaningful profit.
Broker forecasts suggest Ocado will report an annual loss of around £350m in 2024. Last year, the figure was £387m.
Will Ocado make a profit – and should I buy?
The latest broker forecasts I can see stretch to 2026 and still show the business making a loss of more than £250m.
I’m willing to believe the company will eventually become profitable. But with a market cap of £2.8bn as I write, I think some of this hope is already priced in.
Even if I was willing to pay 20 times forecast earnings for Ocado shares, that would still equate to an annual profit of around £140m.
That’s a long way above this year’s forecast loss of £350m.
I think it’s possible that Ocado could quickly swing to profit when most of its current crop of projects are completed and generating fees. It’s also worth remembering the company is starting to expand beyond grocery retail, opening new opportunities.
However, City analysts – who are better informed than me – don’t think Ocado will make a profit in 2025 or 2026.
For me, 2027 and beyond is too long to rely on hope alone. I won’t be buying.
