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.

| 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.

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 assessed. 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.

More on Investing Articles

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 »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »