Up 15% in a month! Is it time I showed this overlooked FTSE value share some love?

Harvey Jones has never paid Sainsbury’s shares much attention but now he’s beginning to wonder whether that’s a mistake. He’s finding plenty to like here.

| 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.

Image source: Getty Images

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.

Some FTSE 100 stocks seem to be a little low on investor love. I can’t help thinking Sainsbury’s (LSE: SBRY) is one of them.

As the UK’s second biggest grocery chain, it lives in the shadow of sector leader Tesco. It’s increased market share faster than any rival over the last year but today’s 15.9% remains well short of Tesco’s 28.1%.

Sainsbury’s has Asda, Aldi and Lidl breathing down its neck, with respective shares of 12.3%, 10.3% and 7.4% respectively. It’s not an easy place to be.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

The share price is suddenly on the up

Also, there’s a wider feeling that the UK grocery sector’s so competitive, investors can struggle to find value here. Sainsbury’s shares will have their good times and bad times, but will they ever smash it?

Yet suddenly they’ve jumped 15.83% in the last month. They’re still down 5.72% over one year, but even so. What’s happening?

Created with Highcharts 11.4.3J Sainsbury Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

On 7 November, the board reiterated guidance for strong underlying full-year profit growth, helped by improving grocery volumes and a stronger second-half performance from Argos. Full-year free cash flow generation should be strong too, which bodes well for dividend growth. Today’s trailing yield of 4.74% is forecast to hit 4.82% next year and 5.14% in 2026.

That easily beats the Tesco traiing yield of 3.23%, although there’s a reason why that’s relatively low. The Tesco share price has smashed it over the last year, climbing 28.72%. It’s up a blockbuster 64.24% over two (Sainsbury’s rose 26.04% over the latter timescale).

Created with Highcharts 11.4.3Tesco Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Sainsbury’s is cheaper though, trading at a price-to-earnings ratio of 12.67 times earnings. Tesco’s P/E has climbed to 15.72%. Given Tesco’s stellar run, now may be the time to invest in Sainsbury’s instead.

I think Tesco shares have run their course for now

Last month, RBC Capital Markets took that exact view. It labelled Sainsbury’s Outperform with a 300p price target. If correct, that’s up 8.45% from today’s 276.6p

RBC praised Sainsbury’s for resetting its price/value proposition, and generating more than £1bn of cost savings in just three years. It expects more of the same over the next three years. Like me, it thinks the Sainsbury’s valuation looks “undemanding”.

RBC slapped a Sector Perform rating on Tesco with a 375p price target, broadly in line with today’s 374.4p. It said Tesco may also struggle to boost its market share from here. It’s not easy being top dog.

Personally, I’d expect the big grocery chains to have a tough year, as recession fears return. Labour’s Budget National Insurance hikes will hit the sector hard. Tesco employs more than 300,000 and Sainsbury’s more than 150,000. The 6.7% hike to the minimum wage won’t help. Nor will sticky inflation, now forecast to hit 3% next year.

So I was curious to see that Kantar reckons UK supermarket sales are set to surpass £13bn in December for the first time. I’ve underrated Sainsbury’s. Now I’ll now consider showing it some love and adding the shares to my portfolio in January.

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended J Sainsbury Plc and Tesco Plc. 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

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Dividend Shares

2 ‘safe’ LSE dividend stocks to consider as global markets sell off

As global markets experience high levels of volatility due to economic uncertainty, investors are piling into these ‘safe-haven’ dividend stocks.

Read more »

Investing Articles

US stock market rout: an unmissable opportunity for investors?

His tech-heavy portfolio has been smashed by Trump’s tariffs. However, Dr James Fox believes there could be some opportunities in…

Read more »

Investing Articles

After a 13% ‘Trump tariff’ fall, is the Barclays share price too cheap to miss?

Does the Barclays share price fall mean we should all panic and run screaming from the stock market? Nah, of…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 investment trusts to consider for a Stocks and Shares ISA

These two investment trusts have a different focus -- but our writer sees both as worth considering, one more for…

Read more »

Investing Articles

Deutsche Bank reiterates Buy rating on 9.6% yielding FTSE 250 stock that was “most shorted in UK”

Our writer investigates why a major broker remains optimistic about a FTSE 250 stock that was once the most shorted…

Read more »

Investing Articles

2 things to remember when stock markets are turbulent

US trade policy has rattled the stock markets in New York, London and elsewhere. Our writer outlines a couple of…

Read more »

Investing Articles

Are Trump’s tariffs a once-in-a-lifetime chance for ISA investors to get rich?

The £20,000 Stocks and Shares ISA limit will reset on 6 April. Smart investors could use current market volatility to…

Read more »

Investing Articles

Here are the latest Persimmon share price and dividend forecasts

Our writer looks at the latest forecasts for the Persimmon share price and considers what level of dividend the stock…

Read more »