The J Sainsbury (LSE: SBRY) share price has performed brilliantly over the last year, rising 57% by last Friday’s close. It’s up another 11% this morning. Could it be about to explode?
Sainsbury’s share price: ready to rocket?
According to headlines over the weekend, private equity group Apollo is taking a closer look at Sainsbury. While this has been referred to as merely “exploratory” (according to the Sunday Times), it does suggest that we could be about to see an offer submitted for the FTSE 100 member.
This shouldn’t really come as a surprise given the bidding war that has erupted for fellow listed supermarket Morrisons. Last week, it was revealed that management would be recommending holders accept a 285p per share bid for the company from Clayton, Dubilier & Rice (CD&R). This valued MRW at £7bn, up from the £6.7bn offer received from rival Fortress.
Sainsbury’s attractions aren’t hard to fathom either. For one, the shares still look reasonably valued and, before this morning, changed hands for a little less than 14 times earnings. It’s also got a big property portfolio and currently has the second-largest share of the UK grocery market.
However, this is not to say that I would be guaranteed a great return on my investment if I bought today.
One rather obvious risk to buying SBRY now is that it won’t actually receive a bid. One can name many firms in the FTSE 100 that have looked like prime takeover candidates for years but that are still to be snapped up. Broadcaster ITV springs to mind. Luxury fashion firm Burberry is another. Both already occupy places in my portfolio. However, I own them because they are, in my view, great businesses. If I were to buy the supermarket’s stock now, I’d need to be confident that Sainsbury is capable of delivering a solid gain without any bid interest.
A further, potential issue here is that Apollo could join forces with Fortress and launch another counter bid for Morrisons. Were this to happen, any talk about acquiring its rival would likely end and the Sainsburys share price rally may run out of steam.
It’s also worth highlighting that SBRY is among the most shorted stocks on the London Stock Exchange, according to shorttracker.co.uk. In other words, a good proportion of traders are betting that the Sainsbury’s share price will fall.
Of course, this could actually work in investors’ favour if bid rumours grow. In such a scenario, the aforementioned traders would rush to close their positions. The resultant ‘short squeeze’ would likely put a rocket under the Sainsbury’s share price. We may already be seeing some of this today.
Based on recent news, I think there’s certainly a chance the share price could continue rising — and potentially explode — over the next few weeks. The fact that it’s already up 6% in early trading today is certainly evidence that the market is getting excited over the company’s near-term outlook.
Even so, I’m less inclined than others to buy today. Based on my own risk tolerance, (long) investing horizon and the business itself, my preferred choice remains market leader Tesco. And if I were solely looking for income from the supermarket space, this real estate investment trust looks by far the least risky option to me.
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Paul Summers owns shares in Burberry and ITV. The Motley Fool UK has recommended Burberry, ITV, Morrisons, 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.