I’m finding it hard to drag up much sympathy for the founders of Ocado. They may not have got the price they at first said they wanted for their online grocery delivery service (up to 275p) when it listed this week. But they must surely be dancing with joy to have got the thing away at all.
We’ve long thought that buying shares in Ocado would turn out to be a rubbish investment. But the interesting thing about this particular IPO is not that we think Ocado is likely to disappoint those who have bought shares at the float (that’s the case with all too many IPOs), but that so many other people agreed with us.
Almost every analyst who looked at the Ocado prospectus had something bad to say about both the business and the price expected for it. And absolutely no one – including, I should imagine, the founders and Goldman Sachs, which was managing the float – could have claimed to be surprised when, having listed at 180p, the shares promptly fell to 155p, 40% below the top price the team had once hoped for.
This is odd simply because it is – so far – a rare example of the investment community reaching a consensus opinion and it being correct. Normally analysts as a group are completely wrong.
The latest McKinsey Quarterly makes this all too clear. According to their research, equity analysts are pretty much always optimistic. Over the past quarter of a century their earnings growth estimates have been “almost 100% too high”. Their forecasts have been particularly useless in times of falling economic growth and they have been generally slow to revise their forecasts to reflect new economic conditions. Overall, only in the occasional year of exceptional growth have actual earnings come anywhere near analysts’ forecasts.
And despite all the rules that have been put in place over the last decade to prevent conflicts of interest and improve the quality of analysis, things aren’t getting any better: average forecasts have been just as bad over the last ten years as the ten before.
This dismal state of affairs is backed up by research in the FT, notes Martin Spring in his On Target newsletter. Look at the investment strategies of the major banks and you will see that if your own strategy is “directly contrary” to the one they advise, you generally do very well indeed. At the start of the year the banks were bullish on the euro and bearish on the yen. They were bullish on China and bearish on US and Japanese government bonds.
All this advice has turned out to be pretty poor – only Ukrainian debt did better than US Treasuries in the first half of the year, for example. So much so that, as Lex points out, in general “the markets continue to reward us for listening to the experts – then doing the opposite”. It’s almost enough to make me think we should have another look at Ocado.