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Has Aldi Peaked? And Should You Now Buy Tesco PLC, J Sainsbury plc And Wm. Morrison Supermarkets?


Over the last five years, the share price performance of Tesco (LSE: TSCO), J Sainsbury (LSE: SBRY) and Morrisons (LSE: MRW) has been dire. While the FTSE 100 has made gains of 30% during the period, the three major supermarkets have seen their share prices fall by 51% (Tesco), 24% (J Sainsbury) and 39% (Morrisons).

A key reason for this has been the increasing popularity of no-frills, discount supermarkets such as Aldi. However, with the latter reporting its results today, has it now peaked in popularity? And does this mean that Tesco, J Sainsbury and Morrisons are worth adding to your portfolio?

Impressive Results

On the face of it, Aldi’s results are impressive. Operating profit is up over 50% year on year and the company is moving ahead with a vast expansion plan over the next handful of years. It has consistently eaten into Tesco, J Sainsbury and Morrisons’ market shares and seems to be well placed to continue to do so.

Growth Slowdown

However, Aldi’s rapid growth rate may not continue unchecked. That’s because it has enjoyed a considerable economic tailwind in recent years that may not be present moving forward. Indeed, inflation has been significantly ahead of wage increases since the start of the credit crunch, with the vast majority of people in the UK having less disposable income now than they did in 2007. This has naturally meant that price has become a far bigger consideration when shopping, which has played into the hands of Aldi because it focuses on offering low prices.

Looking ahead, though, the Bank of England expects wages to rise at a faster rate than inflation from mid-2015 onwards and, while this may not have an immediate effect on any of the supermarkets, in time it could cause shoppers to prioritise price to a lesser extent than they do at present.

The Time To Buy?

This would clearly play into the hands of Tesco, J Sainsbury and Morrisons, since they arguably offer better service and higher quality than Aldi. Furthermore, with shares in the three companies offering top-notch yields and great value at present, now could prove to be the opportune moment to add them to your portfolio.

For example, Tesco currently yields 3.4% and trades on a price to earnings (P/E) ratio of 10.1, J Sainsbury yields 5.8% and has a P/E of 9.2, while Morrisons yields 6.2% and has a P/E of 12.6.

Although the profitability of the three companies has been hit hard by the rise of rivals such as Aldi, the next five years could prove to be a whole lot different and, crucially, could be much more prosperous for Tesco, J Sainsbury and Morrisons. With shares in all three companies being cheap and offering high yields, they could be well-worth buying now for the long run.

Of course, the UK supermarket sector isn’t the only place where there could be high long term profitability on offer. That’s why The Motley Fool has written a free and without obligation guide called Where We Think The Smart Money Is Headed.

The guide is simple, clear and actionable. It could help you to unearth a number of hidden gems and find the most profitable stocks and sectors. As a result of using the guide, 2014 and beyond could be an even more prosperous period for your portfolio.

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Peter Stephens owns shares of Morrisons, Sainsbury (J), and Tesco. The Motley Fool UK 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.