Ocado (LON: OCDO), the most shorted stock in London, is set to post its first-quarter trading statement on Tuesday, March 28…

Its shares are down 29% year-to-date and over 60% in the last 12 months, with the short sellers piling on. 

More than 6% of the company’s stock is shorted by funds, including D1 Capital Partners, Kintbury Capital, and D.E. Shaw, according to ShortTracker.co.uk.

Here’s why we agree with the shorts (for now):

Subdued Demand

The online supermarket is a firm we have been tracking for a while, and before its full year results release, we wrote about the demand headwinds and the potential for more downside in the share price…

“Given the expensive nature of Ocado’s basket, and the fact it is navigating a difficult macroeconomic environment, we lean negative ahead of Ocado’s latest release,” we said. Even earlier, in January, we wrote that “with inflation still near its highs and Ocado one of the most expensive supermarkets, demand will be pressured, especially in the near term.”

Our view was based on several consumer demand indicators, and while not too much has changed, demand has stabilised somewhat.

MoPh Markets’ tracking of Ocado Twitter mentions revealed a jump in late February…

But, qualitative analysis indicates this was primarily due to people entering an Ocado competition, with the chance to win some money to spend at Ocado, as well as a signed Nigella Lawson (Mi-cro-wav-eh, if you know, you know) book and a Nigella Loves hamper… the company last tweeted about the competition on March 8. 

One interesting point here (no, not the Nigella book) is that in its FY22 results, Ocado’s active customers increased, which we will be keeping a close eye on over the next few quarters. 

Ultimately though, we see that number declining in the near term.

Meanwhile, Semrush data shows visits to the company’s site for both the UK and worldwide have yet to push to the upside, although it has remained stable for the last few months. Likewise, Google Trends data show searches remain subdued.

Negative Sentiment

Ocado Consumer Sentiment levels aren’t great…

Over the past month, the company’s happiness levels have been pinned firmly in negative territory, with consumer complaints on social media centred around careless drivers, food quality, and missing items. 

Ocado Expensive – UK Inflation Remains Elevated 

During times of elevated inflation, quality at an affordable price is the play…

But unfortunately for Ocado, it has ranked as the second most expensive supermarket for several months now, according to Which’s Supermarket Price Comparison.

The latest UK inflation data came in unexpectedly higher and with people still concerned with the elevated cost of living, this won’t help near-term demand.

Consumers trading down to cheaper supermarket competitors will also add further pressure.

(Obviously, we are focused on demand trends here, but I wanted to highlight this article by the Financial Times on Ocado’s cash burn, which was quite interesting)

Bottom Line

Overall, we maintain our negative stance on Ocado, with a bearish view on its first quarter. There are currently just too many headwinds at play for us to ignore…

However, we are always flexible in our assessment, and given the significant share price decline over the past year, the mounting shorts, and demand showing slight signs of stabilisation, a flip to a more neutral over the next few months is not an impossibility.

We’ll continue to monitor for updates.