MENU

Why J Sainsbury plc, Glencore PLC And SSE PLC Are Ridiculously Overpriced

Today I am looking at three ultra-expensive London stocks that are difficult to defend.

J Sainsbury

Shares in Sainsbury’s (LSE: SBRY) have enjoyed a stellar run of late, and the business is currently dealing 10% higher from levels seen at the start of the year. But quite why investor appetite remains so giddy continues to escape me, I’m afraid; as latest Kantar Worldpanel statistics showed, the grocer continues to haemorrhage customers and revenues dropped a further 0.3% in the 12 weeks to July 19.

The march of the budget chains like Aldi and Lidl shows no signs of abating — sales here rose 16.6% and 11.3% during the period respectively — a phenomenon which is dragging established operators like Sainsbury’s into an increasingly-bloody price war. And with the critical online and convenience sectors becoming ever-more congested it is hard to see Sainsbury’s jump-starting its earnings outlook any time soon.

The City expects the London firm to follow last year’s 20% earnings dive with a further 19% drop for the period concluding March 2016, a figure that leaves the supermarket dealing on a P/E multiple of 12.8 times — I would consider a reading below the bargain barometer of 10 times to be a fairer reflection of the risks facing Sainsbury’s.

Glencore

Unlike Sainsbury’s, mining giant Glencore (LSE: GLEN) is trading lower from levels punched at the start of the year, and recent nervousness over the resources sector since the middle of spring has pushed shares down 30% from those seen in January. However, I believe that Glencore — along with many of its industry peers — are likely to sink further in the coming months.

The steady slew of poor Chinese data certainly gives my viewpoint more ammunition, and Caixin/Markit manufacturing PMI numbers released this week gave a reading of 47.8 for July. Not only was this the fifth consecutive sub-50 reading but marked the steepest month-on-month deterioration for two years, after June’s reading came in at 49.4. As such commodities prices keep on falling, and bellwether copper hit fresh six-year lows around £5,140 per tonne in recent days.

Consequently the number crunchers expect Glencore to record a fourth successive earnings drop in 2016, and a 12% slide is currently predicted. This leaves the London business dealing on a ridiculously-high earnings ratio of 16.7 times. And with plenty more mined material expected to come on stream in the years ahead, I reckon commodity markets — and therefore earnings at the mega miners — have much further to fall.

SSE

The electricity sector was once a haven for those seeking reliable earnings and dividend growth, the essential role of electricity in the modern world making the likes of SSE (LSE: SSE) an ultra-attractive stocks bet. But shares in the business are currently down 5% since the turn of 2015 in oft-choppy trading as regulators have ratcheted up the pressure on the country’s major operators.

SSE’s pressured revenues outlook took another whack after rival Centica last month announced its intention to reduce gas prices by a further 5% in a bid to remain competitive, a move that will likely prompt SSE to respond in kind sooner rather than later — the firm has lost 90,000 customers since April alone amidst the emergence of independent suppliers.

The City currently expects SSE to suffer a 10% earnings drop in the year ending March 2016, producing a P/E multiple of 13.2 times. And with the Competition and Markets Authority (CMA) also mooting draconian legislative action, including transitional price caps, I believe that the business’ long-term earnings outlook could take a hefty pasting and drives shares further south.

But regardless of whether you share my assessment of the firms mentioned, I strongly recommend you check out this totally exclusive report that singles out even more FTSE 100 winners waiting to kick-start your investment income.

Our "5 Dividend Winners To Retire On" wealth report highlights a selection of incredible stocks with an excellent record of providing juicy shareholder returns. Among our picks are top retail, pharmaceutical and utilities plays that we are convinced should continue to provide red-hot dividends. Click here to download the report -- it's 100% free and comes with no further obligation.

Royston Wild 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.