Shareholders of J Sainsbury (LSE: SBRY) and Jupiter Fund Management (LSE: JUP) have experienced contrasting fortunes so far this year. The share price of the supermarket chain is down 23%, while that of the asset manager has risen 35%.
The two stocks may have performed very differently, but I’m happy to avoid both at their current prices. Here’s why I think they lack investment appeal.
By Jupiter, I’m not buying Jupiter!
Jupiter’s impressive rise has come despite a fall of 8% from over 430p to around 400p last Tuesday. The reason for the drop was news that one of the company’s key managers, Alexander Darwall, is leaving to set up his own fund house.
This followed a previous announcement that Darwall was stepping down from managing the £5.5bn Jupiter European and £2.4bn Jupiter European Growth funds. He’s agreed not to compete with Jupiter’s open-end funds for a period of two years. However, he remains manager of the closed-end £1bn Jupiter European Opportunities investment trust, and it’s expected the trust’s independent board will transfer management to his new firm.
Jupiter’s culture — “portfolio managers are able to operate in a highly autonomous manner with minimal bureaucracy” — is changing, according to analysts at UBS, and this could lead to further departures. But, it’s more the valuation of the company than so-called key-man risk that puts me off the stock.
At the current share price of 400p, its forward price-to-earnings (P/E) ratio of 14.6 is not outrageously expensive, while its prospective dividend yield is actually pretty generous at 6%. However, my trusty valuation yardstick for fund managers is not to pay more than 3% of assets under management (AUM). Jupiter is currently valued at 4.15% of AUM (market cap of £1.83bn versus AUM of £44.06bn). The share price would need to fall below 300p to get me interested.
I’d be off my trolley to buy Sainsbury’s
Sainsbury’s shares rallied to over 340p last year after it announced it had agreed a merger with Asda, subject to approval by the Competition and Markets Authority (CMA). However, they soon turned south on increasing fears the CMA would kibosh the deal. The fears proved well-founded, with confirmation the merger had been blocked coming in April this year.
Annual results a few days later and a trading update last week have done little to revive market appetite for Sainsbury’s shares — currently 205p — although my colleague Karl Loomes reckons the price is now low enough to excite his interest. Personally, I see Sainsbury’s as a weak player in a tough market, and a company whose earnings outlook is deteriorating.
At the time of the results on 1 May, management made no comment on the then-consensus forecast of £652m pre-tax profit for the current year. But analysts at Barclays noted pointedly that management “is aware it would need to say something if this was plainly unachievable.”
Just two months on, and an updated (28 June) pre-tax-profit consensus forecast, published on Sainsbury’s corporate website, is £20m lower at £632m. Keep an eye on that analyst consensus page through the rest of the year. I suspect you may enjoy an object lesson in how struggling companies manage down ‘market expectations’. It could be a more profitable exercise than buying the shares at what I think is only a chimerical current P/E of 9.5 and dividend yield of 5.2%.