Stock pick: Tesco vs Sainsbury’s

Food inflation is now at a multi-decade high. Therefore, it is no surprise that supermarket stocks fell last year. with Tesco (LSE:TSCO) and J Sainsbury (LSE:SBRY) is the UK’s most popular supermarket stock, I’ll decide which is better for my portfolio.

The case for Tesco

Tesco is the UK’s largest supermarket and retailer. It has operations in central Europe, but most of its profits are made locally and from wholesalers. It also earns income from its catering business (Booker), Tesco Bank, F&F fashion range, and more.

Shares in the giant retailer have fallen as much as 30% at one point in the past year. However, he has made a respectable recovery.

This recovery can be attributed to some new positives. But the biggest thing is that Tesco can hold the market share. This is happening despite the cost of living crisis and consumers joining the budget chain. In fact, the company is the only major supermarket that has increased its market share since 2019.

It’s worth noting though, that FTSE 100 The stalwart does not have a good balance sheet. Debt levels are typically higher for retailers because of their large inventories. However, Tesco’s cash level still lags short-term liabilities, which can impact future earnings potential if free cash flow deteriorates.

The case for Sainsbury’s

An alternative stock pick is J Sainsbury. Sainsbury’s also has multiple operations. These include Argos, Nectar, Habitat, and others. And similar to its retail peers, the orange-branded company has made a monumental recovery, and is up 50% from the bottom.

But what sets Tesco apart this year is the action behind the scenes. Sainsbury’s share price began to fly as soon as Bestway, the UK’s largest independent grocery conglomerate, announced it was buying a large stake in the store.

Although a takeover is unlikely at the moment, buying Bestway is certainly attractive to investors. This is because these wholesalers are known for their effective cost-saving strategies. So there is hope that it can have enough leverage to help improve Sainsbury’s margins and finances. After all, the group has seen its debt levels gradually decline over the past few years.

My stock picks

Having said that, choosing between these two stocks is not an easy task. This is because Tesco and Sainsbury’s are excellent blue chip stocks. What’s more, they have the same dividend yield (4.7%). However, the difference between the two lies in their upside potential.

Tesco offers stability and steady passive income, but limited growth. While the same is true for Sainsbury’s, one can argue that there are other rising potentials given a better opportunity to grow market share. This is especially the case with Bestway backing.

So, which stocks should I choose for my portfolio? Well, if I were a pensioner I would probably choose Tesco for the dividend and the constant security. But because I’m willing to look for other growth opportunities, I pick Sainsbury’s. After all, it now trades at a lower valuation than the industry leader, and has a better balance sheet.

Metric	Tesco	Sainsbury’s	Industry average
Price-to-book (P/B) ratio.	1.3	0.8	1.4
Price-to-sales ratio (P/S).	0.3	0.2	0.3
Price-to-earnings (P/E) ratio.	18.6	10.3	14.1
Price-to-sales ratio (FP/S).	0.3	0.2	0.7
Price-to-earnings ratio (FP/E).	12.3	13.6	13.3

That said, I don’t like investing in companies with low returns. Unfortunately, neither Tesco nor Sainsbury’s have produced quality results. Rather, I prefer to buy stocks with higher profit margins, for example Marks and Spencer. So, I wouldn’t invest in one of the supermarket giants right now.