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Sainsbury’s (LSE:SBRY) is one of the FTSE 100Most popular shares. This is because it is one of the few UK supermarket stocks available to trade on the public market. With that in mind, would it be better if I bought the shares earlier this year?
A whole basket back
If I had invested £1,000 in just the past three months, retail shares would have returned approximately 17% of my investment. This translates to an estimated profit of £117, excluding brokerage fees and/or capital gains tax.
| Metric | Share Sainsbury’s |
|---|---|
| Amount invested | £1,000 |
| stock growth | 17% |
| Total dividends | N/A |
| Total return | £1,170 |
Given the time frame and performance of more than the stock market, Sainsbury’s shares have actually generated a rather large return. The FTSE 100 is flat, while the S&P 500 only up 3% since January. However, there are several reasons for the stock’s recent rally.
The first is that undervalued stocks got a lot of attention at the start of the year as UK stocks recovered from the mini-budget event in October. Sainsbury’s share price then rose when Bestway bought a large £250m stake in the company.
Investors hope that Bestway’s position can benefit from JS because of the former’s expertise in reducing costs. And with a strong Christmas update too, sentiment continues to be positive for orange-labelled supermarkets.
| Metric | Q3 2023 | Q3 2022 |
|---|---|---|
| Groceries | 5.6% | 12.5% |
| General merchandise | 4.6% | -6.9% |
| Sale of goods (e.g. fuel) | 5.9% | -4.5% |
| As-is sales (as fuel) | 6.8% | 0.6% |
Will there be a difference?
Having said that, Sainsbury’s shares may struggle to make big gains going forward – at least in the short term. The stock has been trading sideways since late January. Investors caution that grocers may not be able to achieve better prospects as food inflation continues to rise.
| Metric | FY23 view |
|---|---|
| Profit Before Tax (PBT) | £630m to £690m |
| Free cash flow | £600m |
The wobble around the company’s market share is also unconvincing. This can indicate that customers flee to discounters Aldi and Lidl, consequently depressing sales in Sainsbury’s.
Are Sainsbury’s Shares worth buying?
On that side, it should be noted that the conglomerate has a stellar balance sheet, especially when compared to Tesco. Couple that with a healthy dividend yield of 4.1% and there’s an argument to be made that Sainsbury’s shares could be a better investment than their larger counterparts.
What’s more, it has achieved attractive valuation multiples – all of which are below the industry average, even after a strong performance this year so far. That said, the stock has an average price target of £2.48. And with Sainsbury’s share price currently sitting at £2.63, this puts it 6% above its target price.
| Metric | Sainsbury’s | Industry average |
|---|---|---|
| Price-to-book (P/B) ratio. | 0.8 | 1.4 |
| Price-to-sales ratio (P/S). | 0.2 | 0.3 |
| Price-to-Earnings (P/E) ratio. | 10.5 | 13.4 |
| Price-to-sales ratio (FP/S). | 0.2 | 0.4 |
| Price-to-earnings ratio (FP/E). | 13.7 | 12.4 |
This could mean that there is a chance that the stock will fall more than it will rise again. Therefore, it is not a surprise to see that the broker from Jefferies and JP Morgan remain ‘underweight’ in the stock.
The group could see further share price gains in the medium term through better cost savings and greater efficiency, especially now that Bestway has come on board. In addition, the retailer’s Argos division was able to expand successfully and generate a strong and growing revenue stream while increasing profitability.
However, I don’t see this happening in the short term. None of the catalysts showed significant growth in market share or earnings. So, if I buy Sainsbury’s shares at the beginning of the year, I will be looking to sell them for a profit given the limited growth potential, and reinvest in different British stocks to buy and hold for the long term.
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