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J Sainsbury plc And WM Morrison Supermarkets PLC Have Surged. Now Is The Time To Cash In!

Shares in grocery giants J Sainsbury (LSE: SBRY) and Morrisons (LSE: MRW) have understandably trekked lower in recent days as the Greek economic drama has continued to unfold.

Despite these more recent travails, however, both businesses have been among the FTSE 100 index’s best performers during the past month — indeed, Sainsbury’s has added close to 10% during the past four weeks, while its Northern counterpart has gained some 6% in the same period.

But with the progress of budget retailers continuing to chip away at Britain’s established chains, I believe that investors should make the most of this share price resurgence and cash out before the share price crashes.

Deflation dents the top line

Indeed, just today research tank Kantar Worldpanel again underlined the upheaval washing across the grocery sector, and announced that the effect of widespread discounting pushed prices 1.7% lower during the 12 weeks to June 21. Sainsbury’s saw its till roll drop yet again, this time by 1.3% and which pushed its market share to 16.5%.

Morrisons performed better and sales actually edged 0.6% higher, a rare uptick for the Bradford firm. But like Tesco (LSE: TSCO) before it, I believe this will prove a temporary phenomenon as shoppers flock to the industry’s new entrants in their droves — sales at Aldi and Lidl surged 15.4% and 9.1% higher respectively during the three-month period.

Paddling hard but still retreating

Worryingly, none of the country’s major supermarkets have shown the necessary gumption to reignite sales growth. Shares in Morrisons and Sainsbury’s received an fillip this month from news that like-for-like sales at Tesco slid 1.3% lower during March-May, a vast improvement from the 4% decline punched during the corresponding 2014 period.

Still, a fall is a fall and Tesco can thank the effect of huge, earnings-crushing price slashing for this improvement — underlying volumes actually rose 1.4% during the period. The same strategy is being followed across the industry but with little tangible gains — Sainsbury’s announced plans to cut the price of milk to match the budgeteers just last week, while Morrisons took the red pen to 200 more items at the start of the month.

The industry’s fallen giants remain committed to these costly strategies despite their failure to stop the revenues rot, let alone fire sales higher. And although the online and convenience sectors were once considered the key to beating the discounters, congestion in the internet space and stagnating sales at smaller outlets has put the growth prospects of these segments under severe scrutiny.

With the newsflow covering the likes of Sainsbury’s and Morrisons appearing set to remain insipid at best for a lot longer yet, I believe that shares are a surefire bet to resume their downward trend sooner rather than later.

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Royston Wild 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.