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Why J Sainsbury plc Is A Better Investment Than Bricks And Mortar Right Now

Sainsbury's

It is a little noticed fact that plenty of FTSE 100 stocks have thrashed the return from the housing market since the financial crisis. Unfortunately, J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) isn’t one of them.

Despite holding onto its market share far better than struggling rivals Tesco and WM Morrison, its share price is still down 8% on five years ago. That compares to a 42% rise on the FTSE 100 over the same period.

UK house prices have also beaten Sainsbury’s in that time. Over the last five years, the average UK property rose 34% to £262,000, according to figures from the Office for National Statistics. 

This outperformance by property is unlikely to continue, in my view.

The Price Ain’t Right

I suspect (and to be frank, hope) that house prices have finally peaked. Property already takes up too much of our time and money, which could be put to more productive use elsewhere.

More buyers are pulling out of home purchases as banks tighten mortgage standards following the Mortgage Market Review, the recent regulatory overhaul, and borrowers fear the price rally is coming to an end.

And a slew of recent data suggests house price growth is grinding to a halt, especially in London, where homeowners are taking their profits and be investing them in the Home Counties.

With rising interest rates apparently on the way, the trend could accelerate.

Three million homeowners would struggle to meet their repayments if the base rate rose by 3%, according to new research from Nutmeg.com.

Needs Some Work

Slowing property growth has to be a good thing. Too many Britons obsess over bricks and mortar, an illiquid and highly leveraged investment, while ignoring the more liquid charms of the stock market.

Stocks and shares aren’t without their risks, however, as investors in the supermarket sector know all too well.

If Sainsbury’s was a property for sale, the estate agent would probably describe it as “in need of some attention”. Despite delivering 36 consecutive quarters of growth, former chief executive Justin King left it in urgent need of refurbishment.

Subsidence is also a problem, not just for Sainsbury’s, but for all the big four supermarkets, as Lidl and Aldi cut the ground beneath their feet.

Sainsbury’s has been the worst performing supermarket in the past four weeks, during which time its sales fell by 2.2%, according to latest figures from Kantar WorldPanel.

Cheaper Than Bricks

This has knocked 24% of its share price in the last 12 months. During that time, house prices rose 12%. Contrarian investors might be tempted by this glaring discrepancy.

You aren’t overpaying for Sainsbury’s right now. Trading at 9.3 times earnings, its value is hardly demanding, something few would say about today’s property market.

It also yields 5.7%, and although that is likely to be trimmed, few expect it to be cut as drastically as Tesco’s yield. Sainsbury’s has proved better at holding onto upscale customers, allowing it to stay on the fringes of the supermarket price war.

Sainsbury’s has a fight on its hands, but at least it’s available for a bargain price today, which is more than you can say for UK property.

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