Wm. Morrison Supermarkets plc: Opportunity Or Threat?

Wm. Morrison Supermarkets plc (LON:MRW) is suffering big declines as short-sellers jump on the bandwagon and batter the stock while earnings are weak.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

morrisonsIf there has to be an out-of-favour UK large cap stock of the year, it’s got to be Morrisons (LSE: MRW) (NASDAQOTH: MRWSY.US). Since this time last year, the stock has shed 40% of its value. Partly as a result, it’s received a spate of downgrades by analysts.

The latest of those downgrades came on Friday, when BNP Paribas reiterated its underperform rating on the stock, maintaining a price target of 150p per share, the lowest yet. On Thursday, Grupo Santander re-rated the supermarket chain as “underweight”, putting a price target of 170p a share on the company. That followed another downgrade of Morrisons on Wednesday by Jeffries & Co., where analysts cut their price target by 10% on the company to 225p per share. Analysts at Sanford C. Bernstein reiterated their “market perform” rating the Friday before, on August 29th, maintaining a lacklustre price target of 180p a share.

The unremarkable expectations by analysts for the near-term performance of the discount supermarket retailer chime with the opinions of the majority of my Foolish colleagues, to be sure. I admit that am not a fan of business models centered on discount pricing: when cost is the only variable you have to lose, so are your profits, eventually. But that doesn’t mean such a huge reduction in the share price of Morrisons is justified right now.

Management Efforts Count, Too 

The diminished valuation for Morrisons ignores steps that the company’s management has taken to restore future value.

For a start, there’s the massive 1,200-product price slashing initiative the company implemented in May. That’s a considerable range of products, and there are signs it helped the supermarket chain’s core customers — most of whom are bottom-feeders when it comes to bargain hunting — to come back. But that’s not all. The company has invested in both its e-tail business model and its convenience stores, as well as a loyalty programme that will enable it to retain some of its customers in ways that it wasn’t able to before its latest woes set in about a year ago. 

In other words, unlike most companies that hit a hard patch, it appears that Morrisons’ managers understand what is afflicting sales and are actively working to restore the problems.   

Picking Up The Shortfall

But there’s yet another indication that Morrisons is bearing injuries that are not so much to do with its own poor performance so much as they are to do with the sector as a whole: all other competitors are performing badly, too. Discount supermarket chain Tesco has dropped 38% in the last year, while even Sainsbury’s, a more upscale rival, is off 25% — both despite showing profits.

As a result, the percentage of shares of these companies used for stock-lending activity has spiked since the start of the year, indicating short-selling has driven the value of the stock lower. If managers at Morrisons can fix what’s wrong with the company while market conditions normalise, then this stock could come belting back fast as many short-sellers are forced to buy the stock back, compounding gains. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Daniel Mark Harrison has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »