Ocado Group Becomes a Shorter's Nightmare

LONDON -- The share price movements of Ocado Group have always been entertaining, but events of this past week have been fairly remarkable, even by its standards.

The online grocer is one of the stocks that investors seem to love to hate. Currently, it's one of the most widely shorted shares on the market, with a short interest of some 16%, according to publicly disclosed holdings.

After trading as low as 170 pence at the end of last week, the shares jumped 12% on Wednesday. At one stage on Friday morning, they had leapt a further 20% to just under 250 pence, before slipping back somewhat.

A "short squeeze" could well be taking place, whereby those betting on the share price going down are forced into the market to buy shares to cover their positions.

A potential deal with Morrison Supermarkets also seems to be driving excitement right now. Yesterday, Morrisons said it plans to launch its online service by January, and reconfirmed that it was in discussions with Ocado about this. However, Morrisons was also at pains to point that its plans were not dependent on Ocado.

In a statement released in advance of its Annual General Meeting today, Ocado said...

Ocado is in discussions with Morrison Supermarkets which may lead to an agreement to facilitate Morrison commencing an online business in the UK. Any such agreement would be complementary to Ocado's existing partnership with Waitrose, which would be unaffected by any potential agreement with Morrison-product would continue to be sourced with Waitrose, and Ocado customers would continue to buy exclusively from the existing Ocado, Waitrose and branded ranges.

Ocado reconfirms that the arrangements under discussion do not involve Morrison acquiring either the whole of, or an equity stake in, Ocado.

An agreement with Morrisons could certainly see a step change in the scale of Ocado's operations. Ocado is expected to produce revenue of around 800 million pounds this year, whereas Morrisons' annual sales are 18 billion pounds. Both Sainsbury's and Tesco reckon that their online sales are in the region of 5% of their U.K. revenue, so that highlights the potential opportunity.

Today also sees Sir Stuart Rose taking over as chairman of Ocado from Lord Grade. The appointment of a such a retail heavyweight is quite a coup for Ocado, as many investors still have doubts that its business model has a long-term future. It's worth noting that its share price was just 100 pence when Rose's involvement was revealed in January of this year.

At the current share price of 234 pence, Ocado is valued at 1.35 billion pounds. There's no doubt that's a rich price, Morrisons or not, with the company only expected to roughly break even both in 2013 and 2014.

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Stuart Watson has no position in any stocks mentioned. The Motley Fool recommends Tesco. The Motley Fool owns shares of Tesco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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