J Sainsbury plc Is Digging Its Own Grave, But GlaxoSmithKline plc Is Looking Very Healthy

If you’re like me, and you’re cautious with your money, you’ll have had a good hard look at some of the FTSE 100‘s best ‘defensive’ stock offerings over the past 12 months.

Well, within that category, I want to help you out a bit by taking one stock out of consideration, and putting another stock in. I’m talking about J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) and GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US).

Why won’t anyone listen to me?

I don’t understand why the J Sainsbury board isn’t listening to me. I’m a Fool after all!

Here’s the thing. There are two types of grocers performing quite well at present: the discounters, and the premium stores. The other — mid-priced stores — are now frantically downsizing and cutting costs so as to be in a position to compete with the discounters. Why J Sainsbury doesn’t go the other way — towards the premium end of the market, is beyond me.

Last week Sainsbury’s announced that it had suffered its first fall in Christmas sales in over ten years. In response, it’s getting serious with its three-year action plan. The supermarket chain announced earlier this week that it’s cutting 500 jobs at its store support centres (back-office jobs) — the cost of which will be counted as part of a £500 million cost savings programme outlined at the end of last year.

What is Sainsbury’s doing? It actually couldn’t be simpler. It’s reducing costs and cutting prices for shoppers. How will that play out? Well, obviously consumers will benefit from lower prices, but Sainsbury’s also wants to bring its convenience store and supermarket businesses closer together. That sounds very much like the approach Tesco is taking! Funny, that… Anyway this is a yet-to-be-proven strategy for the mid-priced grocers. In the meantime, the stores just lose money.

Part of the reason for that (stores leaking cash) is, believe it or not, Aldi and Lidl are still increasing their market presence. According to The Telegraph, Aldi and Lidl finished off 2014 with a growth spurt of 22% and 15% respectively — leaving them with market shares of 4.8% and 3.5%.

Even more significant, perhaps, is this little fact courtesy of Kantar: more than half of all UK households turned to one of the discounters over the festive season for cheaper alternatives.

And just to rub salt into the wound for the bigger stores… Aldi had a go at selling caviar for the first time at Christmas (20 grams for just under £10). It also introduced a “super premium” range of wines and spirits. Surely if it’s good enough for Aldi, it’s good enough for J Sainsbury?

GlaxoSmithKline could be an alternative panacea

If you’re fed up with Britain’s supermarket offering, there’s always therapy to be had in the healthcare sector. GlaxoSmithKline was mired in controversy for most of 2013 and 2014. I think it’s share price partly reflects that. Let’s now have a quick look at its latest ‘vital signs’.

It has earnings per share of 0.85 (that compares favourably with AstraZeneca‘s 0.53). It’s also sitting on a competitive price-to-earnings multiple of 16 times earnings. Where things get interesting is that the pharmaceuticals company is sitting on an average profit margin of around 17%. Combine that with a dividend yield of 5.5% (covered 1.24) and you’ve got yourself a healthy stock.

This Fool can’t tell you whether the stock will rally significantly in 2015, but with those numbers, at the very least, it’s a “hold”. That’s more than I can say for many of the supermarket stocks.

Skewing the defensive part of your portfolio towards the healthcare sector is a wise move. There is so much more you can do, though, to boost your chances of building real wealth.

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David Taylor has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline and owns shares in 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.