The Sainsbury’s share price is rising. Should I buy the stock today?

Sainsbury’s shares have risen since rival Morrisons attracted takeover interest. Edward Sheldon looks at whether he should buy the stock.

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Sainsbury’s (LSE: SBRY) shares are having a good run at the moment. Since it came to light on 19 June that rival Morrisons had attracted takeover interest, the company’s share price has jumped almost 10%. Meanwhile, over 12 months, the stock is up about 45%.

Is this a stock I should buy for my portfolio? Let’s take a look at the investment case.

3 things to like about Sainsbury’s shares

There are a number of things I like about Sainsbury’s from an investment point of view. For starters, I like the company’s ‘defensive’ characteristics. Supermarkets tend to hold up well throughout the economic cycle, simply because people always need to buy food and essential items. While I’m more of a growth investor, I think it’s important to own some defensive stocks for balance.

Second, I like the dividend yield here. This financial year (ending 6 March 2022), analysts expect Sainsbury’s to reward shareholders with a dividend payout of 11.2p per share. At the current share price, that equates to a prospective yield of 3.9%. In today’s low-interest-rate environment, that’s an attractive yield. Remember, dividends aren’t guaranteed.

Third, the stock’s valuation still seems reasonable, even after the recent share price rise. Analysts expect the group to generate earnings of 21.4p per share this financial year. At the current share price, that equates to a forward-looking price-to-earnings (P/E) ratio of 13.3. That’s below the median forward-looking FTSE 100 P/E of 15.8.

3 concerns 

I do have some concerns about Sainsbury’s shares however. One is in relation to short interest. Right now, SBRY is the most shorted stock in the UK, according to shorttracker.co.uk, with short interest of 8.2%. This means that plenty of institutions are betting the stock will fall.

It’s worth noting that this month, the number of SBRY shares on loan has risen quite substantially and a number of short sellers have declared new positions over 0.5%. This suggests to me the short sellers believe the recent share price rise here is unjustified.

Another concern for me is that, in recent years, Sainsbury’s hasn’t been a very profitable business. Over the last five years, its average return on capital employed (ROCE) has been just 3.7%. That’s very poor. Companies that generate a low ROCE often turn out to be poor long-term investments.

Finally, I don’t think Sainsbury’s has a genuine competitive advantage. There’s really nothing to stop competitors such as Tesco, Waitrose, Aldi, Lidl, and Ocado stealing market share. Ultimately, it needs to cut prices to be competitive and retain market share and that’s not a good long-term strategy, in my view.

Sainsbury’s shares: should I buy?

Weighing everything up, I don’t see SBRY as a ‘buy’ for me right now. To my mind, the risks here outweigh the potential rewards on offer. All things considered, I think there are much better stocks I could buy today.

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 considered so you should consider taking independent financial advice.

Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons, Ocado Group, and 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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