After the Sainsbury’s share price soars 21%, would I still buy SBRY?

The Sainsbury’s share price has leapt by more than a fifth in the past 10 weeks. But with yearly profits set to soar, I still like the grocer’s stock today.

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The orange branding of J Sainsbury (LSE: SBRY) is a familiar sight on Britain’s high streets. The supermarket chain is the UK’s second-biggest grocer, with a market share of almost a sixth (15.2%), well behind Tesco‘s 27.1%. Founded in 1869, Sainsbury’s became the UK’s largest grocery chain in 1922. However, from the 1970s, the group lost ground to Tesco, falling to second place in 1995. The chain has been listed on the London Stock Exchange since July 1973. It has also been a member of the FTSE 100 since the index’s creation in 1984. And the Sainsbury’s share price has been rising steadily recently.

The Sainsbury’s share price surges

Over the past three years or so, the Sainsbury’s share price has been on something of a roller-coaster ride. On 24 August 2018, the shares hit 336.4p, their highest level of the past five years. But then the stock went into steep decline. At its Covid-19 pandemic low, the price fell to an intra-day low of 172.32p on 1 September 2020. But after ‘Vaccine Monday’ (9 November 2020), it soon bounced back, closing at 252.89p on 27 January 2021.

The Sainsbury’s share price soon weakened again, dipping to close at 235p on 28 April. As it happens, I wrote favourably about the stock on that very day. With the shares trading at 236.7p, I said that, “I see value in SBRY” after a near-8% rise in yearly sales. As I write (on Wednesday afternoon), the shares trade around 284.9p. That’s almost 50p above their close on 28 April — a healthy return of more than a fifth (21.2%) in 10 weeks. Delightful.

Sainsbury’s profits are set to soar

Despite this impressive sales growth, Sainsbury’s slumped to a full-year loss of £261m in 2020/21. But this was largely due to additional Covid-19 costs and one-off exceptional charges. In its latest quarterly sales update (PDF), the £6.4bn group raised its guidance for underlying pre-tax profit in 2021/22 from £620m to £660m. That’s an uplift of an eighth (12.6%) on the £580m the chain achieved in 2019/20.

While sales growth in Q1 was ahead of expectations, total retail sales rose by only 1.6% in the 16 weeks to 26 June. But that’s pretty good, given the huge sales boost as the UK went into lockdown in spring 2020. Hence, I see these latest figures as helping to underpin the current Sainsbury’s share price of nearly 285p.

Would I buy SBRY after this 21% price rise?

Though this latest set of figures look fairly pleasing to me, the Sainsbury’s share price has been on a tear recently. Today, it hit a 52-week high, having leapt by almost half (+47.2%) in the past 12 months. It’s also up by 26.3% in 2021, 14.9% over six months and 8.3% over one month. Those are very respectable returns, easily beating the wider FTSE 100.

However, it could be that much good news and optimism is already baked into the shares, so they might be positioned for a fall. What’s more, recent takeover activity in the UK supermarket sector may have had a ‘halo effect’ by lifting the Sainsbury’s share price. Also, the grocer is under relentless pressure from privately owned German discounters Aldi and Lidl. Despite these headwinds, I like the dividend yield of 3.7% a year, plus the forward price-to-earnings ratio of around 9.7. Hence, although I don’t own Sainsbury’s stock now, I would be a cautious buyer at the current price!

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.

Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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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