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This FTSE 100 stock’s share price is up nearly 30% this year: can the rally continue?

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The Sainsbury’s (LSE: SBRY) share price has been on a phenomenal run in 2021. While many supermarket stocks have lagged the market, Sainsbury’s share price is up nearly 30% for the year and approaching multi-year highs. The biggest one-day gain happened in August when the shares jumped over 15% on news of a buyout. Since then, the market has cooled down and reversed some of these gains. So, could it be the perfect opportunity to get in on this FTSE 100 stock?

Buyout news

Speculation of a Sainsbury’s buyout started in April when billionaire Daniel Kretinsky raised his stake in the company to 10%. Such a high level of ownership is a massive hint to the market that a takeover or a change in management will occur. This change left investors excited and was the catalyst behind an extensive run in the stock price.

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Recently, further interest has been received for the supermarket chain when Fortress Investment Group offered £6.7bn to buy it. At a 52% premium to the share price, it was no surprise that investors were eager, and the share price jumped. Clayton, Dubilier & Rice, a private equity firm, then improved this offer to £7bn for the company. 

With so much interest in the FTSE 100 constituent, seeing the share price perform so well this year is unsurprising. Furthermore, there is also a chance that another firm could raise the deal value again. In this case, the share price would likely jump again, rewarding investors in the process.

Beware of the dangers

Whilst there is a possibility that a new firm could raise the stakes, it could also fall apart. A buyout candidate may get cold feet about the supermarket sector or need the capital for other reasons. Based on my calculations, investors are pricing in a 98% chance of a takeover, which shows me that investors are incredibly confident or expect another raise. If the deal falls apart, the share price could see a fall back to pre-2021 levels, a 25% drop.

Holding Sainsbury’s stock also comes with other risks. In an earlier article on fellow FTSE 100 member Tesco, I mentioned the rise in competition in the shopping market and the negative effects of the economy reopening. There is also a nationwide CO2 shortage that is affecting supermarkets. The repercussions of this shortage are that the frozen and meat shelves, which rely on food-grade CO2 heavily, are quickly running out of supplies. Without immediate government action, this could last months, and Sainsbury’s revenue figures could suffer.

Bottom line

News surrounding a takeover of Sainsbury’s is likely to be the main factor moving the share price in the next 12 months. If another firm raises the buyout offer, Sainsbury’s share price will likely experience another huge run. On the other hand, investors will probably see a significant drop if the deals fall through. At this moment, I am sitting on the sidelines and waiting for new news on the topic.

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Harry Godfrey 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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