The Morrisons share price jumped 28% last week! Here’s why I’m staying away

After the Morrisons share price jumped following a takeover bid, Jonathan Smith explains why he doesn’t think the risk/reward stacks up for him right now.

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Man shopping in supermarket

Image source: Getty Images.

When looking at the top performing stocks last week, the Morrisons (LSE:MRW) share price really stands out. Its gain of 28% last week puts it on top of the leaderboard by some distance. With moves of this scale over such a short period, something major must have happened. After all, over one year, the share price is only up 22%. So what’s the story here?

The reason for the jump

The main news that caused the jump was a failed buyout offer. Clayton Dubilier & Rice (a private equity firm), made an offer of £5.5bn to buy the supermarket. This value equates to a share price of 230p. For reference, the share price closed the Friday before at around 178p.

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Given the jump in the shares, you might be puzzled that the offer was rejected. However, this isn’t at all unusual.

Firstly, a rejection of the offer shows that management believes the company to be worth more and the lower price to be temporary. This should give confidence to investors, as the managers should know the business outlook better than anyone.

Secondly, the fact that a private equity firm made the offer in the first place is a positive. The analysts at the company clearly thought 230p a share was a fair level for the Morrisons share price. So the shares jumped higher (and closed Friday just above 230p) as the rest of the market played catch-up.

Finally, just because this bid was rejected doesn’t mean the chance has gone. Other investment firms might come and bid higher for the supermarket. Given the fact that 230p was rejected, any new offers are going to be at a higher price. This could cause the share price to jump even higher in the future.

Where does the Morrisons share price go now?

Trying to forecast the direction for the Morrisons share price from here is very difficult. I end up having to make a lot of assumptions. I could assume that counter offers will be made in the short term at a higher valuation. In this case, I could buy the shares for an expected jump in the near future. But I’m not a fan of buying in the hope of a bid. I prefer to buy because I believe in the company long term.

And if a bid doesn’t happen, I don’t think the Morrisons share price will move much higher than 230p this year. This is because I think future optimism has already been priced in. 

The business is clearly performing well. In the Q1 trading update, total sales were up 5.3% and it said it expects “another year of meaningful profit growth”. But the jump in price (adding a 28% premium) makes me think that this is now the fair price until better-than-expected results come out in the future. These results would need to beat the already optimistic outlook in order to push the Morrisons share price even higher.

Based on that, I won’t be investing right now in Morrisons. I think the potential upside is too small compared to the risk involved.

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jonathansmith1 has no position in any share mentioned. The Motley Fool UK has recommended Morrisons. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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