Ocado (OCDO) topped the FTSE 100 leader board on Thursday, shares in the out-of-favour online supermarket surging 16% higher to 499.4p 84p as bid whispers continued to circulate.

The Times reported speculation of bid interest from more than one American suitor, among them e-commerce colossus Amazon (AMZN:NASDAQ), which is rumoured to be considering an 800p-a-share bid.

There has been no official comment from struggling retail-to-technology business Ocado, whose shares have plunged roughly 40% over the past year with the boost from pandemic lockdowns fading and the growth previously promised failing to materialise.

Ocado thrived during the pandemic as supermarkets rushed to increase their online capacity as worried shoppers spurned the long queues that snaked around car parks at the height of the crisis.

But the company grew too far, too fast, and when inflation followed the return to normality, Ocado was forced to halt expansion plans and cut costs by closing its oldest warehouse.

The cost-of-living crisis has meant shoppers are putting less into their baskets.

Investment bank Jefferies points out Ocado’s shares have struggled post-pandemic ‘with a rising cost of capital coinciding with a commercial model that has put a strain on near-term cash flow and the balance sheet in favour of unlocking close relationships with key partners and a long-term annuity stream therefrom.’

SHORT SQUEEZE

As a result, Ocado is London’s most-shorted stock with 6.1% of the shares out on loan according to shorttracker.co.uk.

In plain English, this means institutional investors are betting that Ocado’s share price will fall. If they are right, they make a profit but if the share price rises, this creates what is known as a ‘short squeeze’, a scenario which is playing out today.

A short squeeze is when short sellers decide to cover their short positions or are forced to do so via margins calls – effectively buying stock as it rises, which in turn can push the price even higher.

‘MEANINGFUL HEADWINDS’

On 12 June, Ocado’s shares rose after BNP Paribas Exane switched its rating from ‘underperform’ to ‘neutral’, saying the company was entering a more ‘settled’ phase after struggling to grow volume and excess capacity post-pandemic.

But the share price soured again yesterday (21 June) after JP Morgan and HSBC cut their target prices on the stock to 400p and 370p respectively.

JP Morgan told clients that Ocado’s online grocery activities will continue to face ‘meaningful headwinds’ in the coming months, while HSBC warned ‘the clock is ticking’ for Ocado amid signs that the pathway towards growth is getting squeezed.

In a brief response to today’s bid chatter, Jefferies commented: ‘The positive response of the equity is likely to outstrip the probability-weighted take-out price. A deeper consideration of the strategic logic and the actual likelihood of an official takeover approach will have to wait for more details. For completeness, we’ve long been a believer that Ocado is "The Denizen of Grocery Digitalisation" and therefore has strategic value.’

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