Will Ocado Group Plc, Shire Plc & Marks and Spencer Group Plc Keep Underperforming The FTSE 100?

Is there a catalyst in sight for turnarounds at Ocado Group Plc (LON: OCDO), Shire Plc (LON: SHP) & Marks and Spencer Group Plc (LON: MKS)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Although the FTSE 100 is down a full 11% over the past year, Ocado (LSE: OCDO), Marks and Spencer (LSE: MKS), and Shire (LSE: SHP) have managed to underperform even this low target. Do these three have the potential to turn things around and catch up to the market at large?

The outlook for Ocado was already dim even before competitor WM Morrison snagged a surprise deal with Amazon to provide the American e-commerce juggernaut with fresh food for its rapidly expanding online grocery delivery service. Competition from traditional grocers’ own online offerings and Amazon are likely to depress margins for the entire sector, much as has happened to traditional physical grocers.

This is why Ocado, although it has continued to grow sales by impressive numbers for 13 straight quarters, may find it impossible to ever raise prices to sufficient levels to provide stable profits. The one saving grace for Ocado could be a long-awaited agreement with an international partner. If the company were to use its technical expertise to help overseas grocers build out their own online platforms, I could see a path to profitability for the company. In the meantime, as long as Ocado is stuck competing with every other grocer, and now Amazon, for your online orders, it will be difficult to turn consistent and significant profits.

Foods good, clothing bad

Unsurprisingly, shares of high street retailer Marks & Spencer have had a miserable run lately as the company has struggled to adapt to the era of fast fashion and online shopping. The good news for M&S is that its food sales have increased for 22 straight quarters and now provide more revenue than the general merchandise division in the UK.

While earnings are forecast to increase in the low-single-digits over the next two years, the long-term outlook for Marks and Sparks still relies on the general merchandise division beginning to pull its weight. If the new management team can combine strong food sales with appealing clothing options, the business could be a stellar buy due to low valuations. However, until management finally reverses struggling sales in areas such as womenswear, I don’t see M&S catching up to the rest of the market.

Ready for growth

Questions over the merits of the $32bn acquisition of US drug maker Baxalta have kept pharmaceutical giant Shire’s shares lagging the market since the deal was first announced last autumn. This massive deal was part of a three-year $50bn acquisition spree with the target of turning the company into a world leader in the treatment of rare diseases.

Analysts have worried that management overpaid for Baxalta and that it will take some time for these many acquisitions to begin bearing dividends for Shire. However, this overlooks management’s long history of integrating new companies and ability to quickly pay down debt due to very high free cash flow from operations.

Furthermore, the pivot towards rare diseases is a wise move. The company is right now too reliant on just a few ADHD treatments, and rare disease treatments offer incredible margins, low competition and fast-track regulatory approval. With shares trading at a low 13 times forecast earnings, I believe Shire could be primed for significant growth.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

30,000 shares in this FTSE 250 REIT could earn me £559 a month in passive income

Real estate investment trusts can be great passive income investments. And Stephen Wright likes one from the FTSE 250 with…

Read more »

Investing Articles

Down 24% and yielding 9.18! Is L&G the best passive income stock on the FTSE?

Harvey Jones is the first to admit that the Legal & General share price has had a poor year. But…

Read more »

Investing Articles

Warren Buffett just bought these 2 stocks!

Warren Buffett just invested $700m in these stocks! What’s the strategy behind them, and should investors think about following in…

Read more »

Investing Articles

£10 a day invested in UK stocks could create a second income of £40,000 a year!

Investing even a small amount of money regularly can generate a substantial second income stream in the long run. Zaven…

Read more »

Content white businesswoman being congratulated by colleagues at her retirement party
Investing Articles

Are these the best stocks to buy and hold in a SIPP?

The UK has 30 ‘Dividend Aristocrats’ to buy and earn rising passive income in a SIPP, but are they the…

Read more »

Investing Articles

These UK shares are close to record cheap levels

These two UK shares are trading below their average earnings multiples, creating a potentially explosive buying opportunity for patient investors…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

My Stocks and Shares ISA has exploded in 2024. Here’s what I’m doing now

Zaven Boyrazian’s Stocks and Shares ISA is beating the FTSE 100 and S&P 500 in 2024. Here’s a look at…

Read more »

Investing Articles

Here’s the dividend forecast for Lloyds shares out to 2026

Predictions for dividend progress from Lloyds shares over the next few years look upbeat now. But the path might not…

Read more »