Stock market rally: should I sell overpriced Ocado shares to buy dirt-cheap Cineworld?

Is the stock market rally my chance to pick up comeback king Cineworld Group, sell Ocado shares, or even buy them at a discount to recent highs?

| 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.

The stock market rally has turned the investment world upside down. Lockdown winners are falling, while lockdown losers are soaring. This poses a challenge for investors like me. Should I dive into fast-recovering FTSE 100 sectors such as airlines, cruise operators, pub chains and hotels, or buy fallen heroes such as tech stocks and food delivery firms?

Or, to put it another way, is the stock market rally the ideal time to buy beleaguered cinema chain Cineworld Group (LSE: CINE) and sell food delivery specialist Ocado Group (LSE: OCDO)? Or the other way around?

Measured over 12 months, the performance of these two stocks couldn’t be more different. The Cineworld share price has lost three quarters of its value, while the Ocado share price has doubled. However, since Pfizer announced its vaccine breakthrough on 9 November, they’ve streaked off in completely opposite directions.

Ocado and Cineworld are so different right now

Cineworld has outpaced the wider stock market rally, its share price rising 62% since the Pfizer announcement. By contrast, Ocado has fallen 10%.

Today’s valuations are extremely different, despite the stock market rally. Cineworld is still dirt cheap, with a price-to-revenue ratio of 0.2 and price-to-book value of 0.3. By contrast, Ocado’s numbers stand at 9.9 and 16.5 respectively. While these figures aren’t entirely comparative, I think they give us a fair idea of how cheap Cineworld is, and how expensive Ocado has become.

I’m certainly wary of buying Ocado, even though home food deliveries are rising again in lockdown 2.0, and Christmas is coming fast. I’m more concerned about 2021. If that vaccine works, people will rush out to enjoy the luxury of dining in actual restaurants. The demand’s there, just look at the success of Eat Out to Help Out.

Ocado has offered a double blow lately, as new figures show rival Waitrose eating away at sales, while it’s being sued by Norwegian rival AutoStore for a warehouse technology patent breach. Its shares are up 850% in the last three years, and that level of success is hard to replicate.

If the stock market rally continues, Ocado could miss out. It still has plenty to offer, especially with its M&S joint venture showing strong trading. But I’d rather bank profits than buy today.

Cineworld is soaring on hopes that a vaccine will make people feel comfortable watching a big screen in a darkened room with hundreds of their fellow citizens. My worry is that the damage has already been done, as the cinema chain has run up an $8bn debt pile due to Covid-19.

Stock market rally may not be enough

Management is now doing all it can to stay solvent until the spring, when it hopes for a double shot in the arm from the vaccine and a fresh stream of blockbusters. It’ll be touch and go. I can foresee a time when cinema goers are queueing round the block to see the long-delayed James Bond film, but there’ll be some anxious times before then.

My worry is that Cineworld will be a greatly weakened operation, with fewer screens and audiences used to streaming at home. Right now, both stocks are too risky for me, although in very different ways. I’m now looking for better ways to play the stock market rally.

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.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »