Hedge Funds Bet That J Sainsbury plc, Wm. Morrison Supermarkets plc & Tesco PLC Have Further To Fall

Supermarket giants Tesco (LSE: TSCO), J Sainsbury (LSE: SBRY) and Morrisons  (LSE: MRW) have had a rotten year.

Sainsbury'sAll three have seen their share prices tumble over the last 12 months: Tesco is down 32%, Sainsbury’s is down 20% and Morrisons has plunged a mighty 38%.

Many contrarian buyers will see this as a great opportunity to load up on household name stocks at bargain basement prices. But could they have even further to fall?

Hedge fund managers reckon so.

Incredible Shrinking Giants

Hedge funds have bet million pounds on supermarket shares falling further, with Sainsbury’s now the second most shorted stock in the FTSE 100.

A big concern is that new Tesco boss Dave Lewis will set his stall out by slashing prices and triggering another supermarket price war, squeezing margins further across the sector.

The big supermarkets are already under massive pressure from fast-growing discount retailers Aldi and Lidl — now they are responding by turning on each other.

Not So Super

There’s another reason to be wary of investing in Tesco, Sainsbury’s and Morrisons. The big supermarkets appear to have lost their superpowers, possibly for good.

New research by IGD has found that brand loyalty has collapsed, with the average shopper now visiting four different supermarkets to ferret out the best deals in each.

The proportion of people visiting more than one store on a single trip has risen from 42% to 47%. 

The lingering effects of the recession has destroyed the last vestiges of brand loyalty, as savvy shopping techniques have become mainstream, IGD says.

The internet has also made comparing prices easier, with websites such as allowing consumers to compare shopping baskets across nine different stores, to find the cheapest place to buy their favourite items.

Supermarkets look like another business model that the web is helping to destroy.

morrisonsDeath Of The Hypermarket

Talking of deadly long-term trends, IGD has previously warned that sales from the internet, discount retailers and convenience stores will overtake supermarkets and hypermarkets by 2019.

This isn’t all bad news. Tesco and Sainsbury’s, and increasingly Morrisons, have a presence in two these markets. Their online and convenience offshoots are growing quickly, offsetting slippage elsewhere.

The supermarkets are already rethinking their superstore strategies. Tesco is turning its landbank into housing. That may be a sensible move, but it’s also an admission of defeat.

Hedged Bets

This is the third time hedge fund managers have targeted Sainsbury’s this year, after previous bouts of shorting in May and August. 

Given dismal recent supermarket share price performance, many of these bets will have been winners.

Despite the sector’s troubles, I am tempted by lowly supermarket valuations. Tesco trades at 7.7 times earnings, Sainsbury’s at 9.5 times and Morrisons at just 6.9 times. 

It would only take a bit of good news for their share prices to rebound.

Their yields are fresh and fruity, at 5.95%, 5.54% and a crazy 7.43% respectively, but on closer examination, they’re a little too ripe. Speculation is growing that supermarket dividends will fall victim to the next price war.

Supermarket Clean Sweep

I don’t take hedge fund manager punts as a guide to my own investment decisions. Tesco and Sainsbury’s could still reverse their short-term miseries, especially if wages finally start rising. Morrisons needs to do something radical to reverse its malaise.

But as shoppers change their habits, all three remain vulnerable to long-term structural decline.

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Harvey Jones has no position in any shares mentioned. The Motley Fool owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.