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These are five of the best FTSE 100 shares in the previous month. Each business operates in a different industry, providing this basket with a good amount of diversification if investors were to buy it today. But would buying these businesses be a smart move? Or is it a trap that could put investors' portfolios at risk?
Check out the winners
Over the past 30 days, the biggest winners among the FTSE 100 are:
- This is St James's area – Up 22.4%
- The Ocado Group (LSE:OCDO) – Up 18.8%
- Haleon – Up 11.2%
- British American cigars – Up 11%
- Smith & Nephew – Up 9.7%
Overall, this basket of five stocks rose by an average of 14.6% in just one month. Considering the FTSE 100's have struggled to deliver more than 6% a year over the past decade, that's an impressive return. And if such momentum were to be maintained throughout the year, it would not take long for a small investment to turn into a mountain of wealth.
Obviously, achieving a return of nearly 15% each month is very difficult. In fact, even world-class investors like Warren Buffett couldn't pull off that trick. But evaluating the winners can reveal potential buying opportunities for long-term growth. So how can investors decide which ones to buy right now?
Drowning in the weeds
Let's take a closer look at Ocado. Despite being a big winner this month, a look back reveals a scary story – shares are down more than 80% since the start of 2021!
Ocado is a business I have focused on in the past. This company is well known for being an online grocer. But behind the scenes, it has developed an automated warehouse system that allows businesses to prepare and pack online orders ready for shipment, greatly increasing efficiency. This robotics part of the business is what attracted my initial interest. But I seem to have overlooked an important aspect – cost.
Developing and building these specialist warehouses has been incredibly expensive. And even now, the club sees hundreds of millions of pounds rushing out the door. To make matters worse, it seems that some customers are also losing interest. Kroger's has closed three sites partnering with Ocado, with Sorbeys you click the stop button on another.
Supermarkets use a lot of electricity, and energy is becoming more and more expensive to the point where human labor may become cheaper.
An important point
To Ocado's credit, management appears to be reigning in costs. Cash flow is on track to fall by £150m this year compared to £100m previously expected, thanks to lower capex and better cost controls.
On an adjusted EBITDA basis, its technology platform has become the leading segment in the first six months of 2024. That may be why stocks have soared over the past month.
Obviously, it's an encouraging sign. However, even with this improvement in cash burn, it looks like Ocado will need to raise more cash in the future. In fact, we are already seeing this happen with the £250m of convertible bonds issued at the end of July.
So, personally, even with its recent positive progress, Ocado shares are not on my buy list yet. This shows that just because a stock has done well recently does not guarantee that it will continue to do so in the future. The same applies to other top players in the last 30 days. Investors need to analyze what drives returns and whether they can be sustained over time.
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