FTSE 100 struggles on oil weakness, US tech sell-off and European Covid fears, AO’s nightmare before Christmas, and Pets at Home pepped up by pet boom

“A slump in the oil price as the US taps into its strategic reserves helped put the FTSE 100 on the back foot on Tuesday,” says AJ Bell Investment Director Russ Mould.

“The air has been coming out of the market like a slowly deflating balloon over the last week or so but it has accelerated this morning, not helped by a sell-off in US technology stocks overnight.

“This was linked to fears of more rapid tapering of financial stimulus and hikes to interest rates after Jerome Powell was re-nominated for another term as chair of the US Federal Reserve.

“The fourth wave of Covid being endured in parts of Continental Europe is prompting the reintroduction of restrictions and resulting civil unrest, threatening its economic recovery.

“In combination there’s plenty to make investors nervous as winter begins to bite. Some businesses continue to do quite nicely though. The ability for building materials firm CRH to push through price increases was notable with the company able to look forward to an infrastructure boom in the US.

“Newspaper publisher Reach’s digital-led strategy continues to bear fruit, as it continues to shake off fears that it is a business in terminal structural decline.”

AO

“After being one of the best performing names on the UK stock market in 2020 with a 355% share price gain, AO has come back to earth with a bump. Its shares have been in freefall for some time and today’s warning means the stock is now down 78% year to date.

“Higher costs, stock availability issues and fierce competition in Germany are all to blame for its woes. The company remains optimistic these are short-term problems and that the structural shift in favour of e-commerce will ultimately benefit the company. However, when you’re only earning small margins, any increase in costs will have a big impact on profitability and so AO is really feeling the pain at present.

“Fundamentally AO’s proposition is sound – it offers a wide range of products at competitive prices and it has a good reputation for top notch customer service. These days if you order something online, you want the experience to be as painless as possible and that includes taking delivery of the item, and AO ticks the right boxes.

“The ongoing challenge to its business model is the fact there are so many other companies offering the same proposition via the internet. Not only does that mean competing on price, but it also means competing for online advertising space such as bidding for the favourite search terms, and that is one area where AO is incurring extra costs.

“AO has gone from being a lockdown winner to a post-vaccination era loser. It did so well during the early stages of the pandemic, selling computers to people working away from the office, freezers to people stocking up on food, and TVs to families looking for a sharper picture as they try to entertain themselves at home. Now some of those tailwinds have faded, and it has also been struck by supply chain issues meaning it can’t offer everything that people want.

“Having cracked the UK market pre-pandemic, a lot of AO’s growth story was pinned on success overseas, led by Germany. That’s now looking a bit shaky as Germany has proved to be a much harder market in which to excel. If AO decides it can’t expand profitably overseas, then a lot of investors are going to take a hard look at the business and its share price could experience even more pain.”

Pets At Home

“The race to buy pets during the pandemic has pepped up Pets at Home no end. Many people introduced a feline or canine addition to their household during lockdown and now these furry friends need looking after.

“Where Pets at Home deserves credit is in sharpening its proposition to take advantage of this wave of new business.

“Demand not just for goods like food, treats and toys but also for veterinary and grooming services has shot up and Pets at Home has been well placed to take advantage as previous investment in boosting its paw print and adding new expertise has paid off.

“With an enhanced digital offering, which includes customers being able to contact and interact with staff through live feeds from the comfort of their own home, and a burgeoning VIP loyalty card scheme, Pets at Home has been able to take market share from smaller, less robust competitors and protect its position from the threat posed by non-specialists like the big supermarkets.

“The main cloud on the horizon is the looming departure of the man who helped make all this possible: current CEO Peter Pritchard.

“His will be a hard act to follow when he walks away next summer, though at least he leaves a business which is in very healthy condition.”

These articles are for information purposes only and are not a personal recommendation or advice.