“The shares are up by more than 40% in early trading, to take them to new all-time highs at around 800p.
“According to www.shorttracker.co.uk some 7.2% of Ocado’s shares have been sold short by funds, or some 47.6 million of the 663.6 million shares currently in issue.
“Today’s 250p-a-share price surge means those positions have cost the bears some £119 million in the opening minutes of today’s trading.
“These funds know what they are doing and the risks they are taking - and it could have been worse.
“The data from www.shorttracker.com shows that the total short position in Ocado peaked at more than 21% of its shares in summer 2016. That figure has gone progressively lower as the bears have capitulated and the company has racked up the partnership deals with Swedish (ICA), French (Groupe Casino), Canadian (Sobeys) and now American firms to validate its strategy and its technology.
“Ocado’s £5 billion market cap now put it on the fringes of the FTSE 100 – where a valuation of around £5.5 billion is needed for automatic entry into the benchmark index via the quarterly reviews – although management now has to prove it can turn the technology partnerships into profit and cash flow, so the hard work may be just beginning.
“After all, the company is still expected by analysts to make a pre-tax loss in 2018 and 2019, partly due to the start-up costs associated with the partnership deals.
“However, the Ocado share price surge does offer two valuable lessons when it comes to short-selling:
1. Short sellers are not always right. The shorts can and do get things wrong. As such management and investors do not need to be frightened of them or rail against them as an unnecessary evil. Like everyone else, the shorts do their research and take a considered view of a company’s competitive position, management acumen, financial strength and valuation before judging the balance between risk and reward of a potential position.
2. Management should focus on managing the assets and not the share price. Tesla’s Elon Musk has begun to rail against short-sellers and this is not a good sign. It is a chief executive’s job to manage the assets of the company to best effect, not the share price. If Mr Musk had not raised expectations to huge levels, driving Tesla’s market valuation ever higher, and then failed to deliver, the shorts might not have turned up in the first place. If Tesla starts to meet its production targets and manufacture cars in a manner than means the company makes a profit and generates cash then the shorts might go away – as Ocado is seeking to prove. The company is – so far – proving the sceptics wrong by winning new technology partnership deals although it does also now need to show that these relationships will ultimately translate into profits and cash flow. If Ocado fails to do so, then the bears, bruised and battered as they are, may come back and take out fresh short positions.