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The Sainsbury’s share price rose 15% yesterday. Would I buy it?

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Supermarket aisle with empty green trolley
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Would I buy Sainsbury’s (LSE: SBRY) shares after their big rise on Monday? To answer that question, I think it is essential to first consider why they rose so much. The FTSE 100 supermarket’s share price increased to 341p, a level not seen in years. According to reports I read, this was either a seven- or a 15- year high. My own data showed a somewhat more subdued high of three years. Whichever way we look at it though, it is clear that there was a sharp increase. This followed speculation that it might be a buyout target. 

Why did the Sainsbury’s stock jump?

After Asda’s sale to private equity funds earlier this year and the process underway for Morrisons as well, it now appears to be Sainsbury’s turn. According to news reports, the US-based Apollo Management Group has offered it a price of £7bn. If Sainsbury’s shows an interest, it is quite likely that the price will be revised upwards over time. 

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This is because right now, this is exactly the price offered to Morrisons, which is only the fourth largest supermarket in the UK compared to Sainsbury’s, which is the second largest, smaller only than Tesco. Moreover, since the initial offer for Morrisons came in during June, its price has been bid up by 27%. Even though the actual valuations of the two companies can differ based on their individual financial profiles, it does seem reasonable to think that better offers could be coming. 

And if its valuation increases, so will its share price. Morrisons’ share price is up over 60% from the time the initial offer came in. And it is exactly this speculation that drove up Sainsbury’s share price yesterday as well.

What’s next for its share price?

Whether it rises further or not will depend on the supermarket’s reaction to. If there is no progress on buyout talks, I think the share price could fall from here. The next few days will tell us exactly what is going on, but by the time that we get some clarity, I reckon its share price would have reflected events. 

My point here is this. It is already too late to buy the stock speculatively for fast gains. I may make some gains, but will they be worth my while? I have no way of knowing right now, and this is really not my investing style either. 

What I’d do

If I really have to buy a supermarket stock, I would much rather buy Tesco. In a comparison of the two I first did in 2019, it was already clear that Tesco is better prepared to transition to next-generation shopping. The pandemic proved this as it quickly adapted to the new normal with an improvement in its digital sales platform. Also, in 2019 Tesco’s stability was preferable to Sainsbury’s more adventurous approach at the time, referring to its proposed merger with Asda. I think that assessment is still true today.  

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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.

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