FTSE hits one-month low, Rolls-Royce down on ‘sell’ note, Ocado Retail enjoys record Christmas, Vodafone inks partnership with Microsoft and THG on comeback trail

“The FTSE 100 slipped to a one-month low, dragged down by healthcare and financial stocks. Part of the problem is central banks constantly teasing the prospect of rate cuts but then refusing to commit, which is causing unease among investors. There are plenty of signs that inflation is coming down and this is fuelling the rate cut expectations on the market, yet central banks are being spectacularly stubborn,” says Russ Mould, Investment Director at AJ Bell.

“To stir the pot, UK wages grew at their slowest pace in almost a year, extending the view that inflationary pressures are easing. Data points like these don’t seem enough to put central banks on a different path and we’re facing the risk that the likes of the Bank of England and European Central Bank will act too late to avoid a sharp economic slowdown.

“Rightmove was the biggest faller on the FTSE 100 after a rating downgrade from JPMorgan, sliding 4%. US group CoStar recently bought property portal OnTheMarket to enter the UK market and that has raised fears among investors and analysts that Rightmove’s dominance could finally be challenged. CoStar is a big player in the States and has the muscle to really upset Rightmove’s long-standing market position.”

Rolls-Royce

“After being one of the best performing UK stocks last year, Rolls-Royce is finding life harder on the stock market in 2024. It was the second biggest faller on the FTSE 100 on Tuesday as a result of negative broker comment. Berenberg slapped a ‘sell’ rating on the stock, knocking the wind out of the engineer’s sails.

“Last year was all about a new chief executive saying they would take decisive action to shake up the business and sort it out once and for all. Investors loved the ‘go-getter’ approach and lapped up the stock.

“Reality is now sinking in and the market will need to see hard evidence of change in order to keep bidding up the shares.

“Berenberg said it was impressed with the ‘strategic philosophy’ of the new boss but concluded the risk/reward was unfavourable for owning the stock. It has concerns on Rolls-Royce’s pricing, competition and issues around the XWB-97 engine.”

Ocado

“News Ocado Retail enjoyed a record Christmas is eye-catching but partly reflects the impact of inflation. The significant news is that the company is confident it delivered on guidance for a return to positive earnings in the financial year just gone.

“Ocado Retail is a 50-50 joint venture between Ocado and Marks & Spencer, with the two partners experiencing a big divergence in fortunes of late. What happens with the partnership going forward is open to question with some suggestions Marks may look to take it over eventually.

“Online groceries are here to stay. However, whether or not the service can be as profitable as it was during the pandemic is open to question. The economics of delivering a weekly shop to someone’s door are highly dependent on the amount they’re ordering as the costs of doing so don’t really fluctuate too much. Although minimum basket sizes can be implemented, with smaller orders incurring more onerous fees.

“It’s significant that basket sizes by number of items were pretty much static, even if the value ticked up.

“When it comes to the wider Ocado business, if it is ever to recapture the excitement which propelled it to the highs seen at the height of Covid, it needs to demonstrate it can deliver on a model of offering a one-stop shop solution for supermarkets looking to build out their web-based offering and make this profitable.”

Vodafone

“Vodafone might have been hoping that news of a strategic partnership with Microsoft, involving the market’s hottest theme, AI, would have delivered more of a kicker to a moribund stock this morning.

“The company is planning a significant outlay as it looks to use Microsoft’s generative AI technology to build out its ‘Internet of Things’ connectivity plan. It wants to develop new digital and financial services for small and medium sized businesses in Africa and Europe and revamp its data centre cloud strategy.

“As the benefits of the partnership come through, they may help to provide some forward momentum to a business which has been stuck in reverse for years.”

THG

“THG has spent a long time nursing its wounds after the bubble burst on the hype around its business. It became the laughing stock of the UK market, had to stomach large share price losses and then battled takeover interest.

“There are now tentative signs that THG is finding its feet again, which suggests braver investors might start to give it a second look. However, THG needs to show multiple consecutive periods of progress to properly win over the market and we’re still some way off that point.

“How does the scorecard look so far? In the final year just ended, it returned to group revenue growth on a constant currency basis (albeit minimal), achieved free cash flow breakeven, improved margins, won a new deal to handle the fulfilment needs of Holland & Barrett’s online operations and secured work for major brands including PepsiCo and L’Oréal.

“In the context of its earlier problems that is positive progress, yet there is a lot more work to be done to put this business into decent shape. If it cannot sustain the positive momentum, THG risks falling back into the quicksand.”

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