Tesco PLC, J Sainsbury PLC And WM Morrison Supermarkets PLC: Are The Supermarkets Value Traps?

…or are Tesco PLC (LON: TSCO), J Sainsbury PLC (LON:SBRY) and Wm Morrison Supermarkets PLC (LON:MRW) turnaround prospects?

| 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.

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.

We used to think of the supermarkets rather like we think of Apple: a remorseless trend of expansion, growing profits and a growing share price. The more smartphones Apple builds, the more they sell. The possibilities seem almost infinite.

No tree grows to the sky

But no tree grows to the sky; eventually the tree’s height is countered by the pull of gravity. Growth always has its limits. And so it has proved with the supermarkets.

The supermarkets are now starting to think less like Apple, and more like OPEC. They have realised that, while retail demand in the UK has remained largely static, supermarket supply has been increasingly linearly all the way since the 1950s.

It’s been a simple process. Each decade the supermarkets have built more shops, and they have increased their sales, and their profits. And their share prices trended higher and higher. This continued until about the time of the Credit Crunch, when something interesting happened.

Ever since the Great Recession the supermarkets have still been expanding, yet they have no longer been growing sales, and their profits have begun to fall. The share prices of these retail giants have begun to trend downwards.

A long road to recovery

This year the supermarkets’ results have been terrible. It’s as if they have hit a brick wall. People initially talked about Tesco having difficulties, but we can now see that Tesco (LSE: TSCO), Sainsbury (LSE: SBRY), Morrisons (LSE: MRW), Asda and even Waitrose have all been suffering. This thing is happening across the board.

Until now I have thought of the supermarkets as contrarian plays and turnaround prospects; my view was that their difficulties were just bumps in the road. But these results have made me think that there is something more fundamental at work here. Some investment experts have started to talk about the supermarkets as value traps. This sounds very harsh. But is there the possibility these experts may be right?

I am certainly holding off from investing in this sector, no matter how low share prices have already fallen. The balance between supply and demand has been lost. The supermarkets need to shift their focus from volume to profitability. In the past, increasing volume meant increasing profits. In the future, it will mean decreasing profits.

As the economy improves, retail receipts will start to rise. This gives the supermarkets hope, but the road to recovery will be long. I think it is still much too early to invest.

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.

Prabhat Sakya has no position in any shares mentioned. 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.

More on Investing Articles

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »