Why J Sainsbury plc Could Surge 40% In Less Than A Year!

J Sainsbury plc (LON:SBRY) is not the best bet in the food retail sector, but there’s lots to like in the strategy of its rivals, from which it could benefit, argues this Fool.

| More on:

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.

I think the shares of Sainsbury’s (LSE: SBRY) offer a rather attractive entry point right now. But will they rise to 350p by the end of the summer, or will they plunge to 200p as pressure on food retailers’ operating profits continues to build up in the UK? 

Here are a few things you should know before assessing the possible value of the investment. 

On Its Way Up? 

Back in May 2014 I argued that Sainsbury’s, the third-largest food retailer in the UK, was not the most obvious restructuring play in the industry. At that time the stock traded at 339p and I predicted a 20% downside for investors, for an implied price target of 270p. 

The shares plunged to a multi-year low of about 224p in early October, and now trade at 260p.

Time and again, I have said trading multiples mean very little when it comes to assessing the equity value of food retailers, one of the reasons being that nobody really knows whether the biggest players in the industry have hit rock bottom, or more pain lies ahead in terms of assets write-downs and shrinking profitability.

So, where does value reside in Sainsbury’s? 

I still believe other shares in the sector, as well as other sectors, offer more upside than Sainsbury’s in the next 12 to 24 months, but Sainsbury’s could benefit from corporate action and restructuring plans at its rivals. Recent trends have shown that. 

Read-Across

As I pointed out in my coverage of Tesco (LSE: TSCO) back in December, Tesco’s latest profit warning accelerates the process according to which the largest supermarket chains in the UK must take bold action, which is fantastic news for ailing food retailers and their shareholders, in particular. 

While I prefer Tesco, whose shares have risen more than 30% since mid-December, the shares of Sainsbury’s have surged only 14% in about a month. Could they deliver a 40% pre-tax return to shareholders?

Well, if it’s a bounce from the lows, surely plenty of value could be up for grabs in months ahead. Brokers disagree, and they have pencilled in an average price target of about 240p a share. The possible rise in the shares does not depend on Sainsbury’s own strategy and fundamentals, however. 

The latest few weeks of trading suggest that Sainsbury’s will continue to deliver value to its shareholders if its chief rivals, Tesco and Morrisons, continue to implement radical changes. In this context, Sainsbury’s is cutting costs to preserve profitability, which should help its financials. And even assuming a massive discount to the book value of its assets, Sainsbury’s could be worth more than £7bn, which is a 40% premium to its current equity value. 

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.

Alessandro Pasetti 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

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

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 »