Why I Still Wouldn’t Buy J Sainsbury plc, Tesco plc & WM Morrison Supermarkets plc

 “Year-to-date we have traded well, with both sales and cost savings ahead of expectations. Should current market trends continue, we expect our full year underlying profit before tax to be moderately ahead of our published consensus.”

This was the last paragraph of the second quarter trading statement from the new CEO of J Sainsbury (LSE: SBRY), Mike Coupe. His comments, together with the rest of the positive trading statement, had a very positive impact on the share price: at the time of writing, they are currently 15% to the good over the last 7 days against a volatile FTSE 100, which has seen the wrong side of the 6,000 mark all too often recently. The shares — together with Tesco  (LSE: TSCO) (+7%), Rolls-Royce (+6%), BP (+5%) and WM Morrison Supermarkets (LSE: MRW) (+5%) occupy the top five positive performers from the last 7 days.

A change in sentiment?

Now, I read rather a lot of trading statements and company results from my trading desk, and though I still think that the statement read very positively, on its own I don’t think that it justified the price rise.

To me, the rise seemed like a combination of investors breathing a sigh of relief that sales appeared to stabilise and the hope that the rot may have stopped – or at least slowed a little, with like-for-like retail sales down by 1.1% (excluding fuel).

Elsewhere, others have speculated that the spike in the price was simply supermarket bears closing their short positions – a quick look at the three-year chart below clearly shows that supermarkets have not been the place to be for investors. As we can see, all three companies have materially underperformed the main index as sector disruptors Aldi and Lidl eat their lunch.

One swallow doesn’t make a summer

Whilst the news was welcome, it is as yet unclear to what extent the Big 4 have been able to stop the rot. Next up will be Tesco, which reports its interim results on Wednesday. Investors have marked the shares up by over 7% thanks to the positive news from Sainsbury’s. They will be hoping for news that the company’s fortunes are on the mend in the UK, too. However, Tesco is an international business, and its problems spread further than simply trying to turn the UK operation around – just imagine the impact of a global slowdown of group sales… this could spell disaster.

True, there are sure to be a plethora of initiatives going on behind the scenes, not to mention the potential for parts of the business to either be sold or spun off. However, for me the £9bn debt load and lack of a dividend is more than enough to keep me away.

Investors also sought out shares in Morrisons, another embattled supermarket chain embarking on a turnaround. Presenting the group’s interim results, new CEO David Potts closed with: “It will be a long journey. We approach the challenge with energy, confidence and many strengths, particularly our strong balance sheet and cash flow, which enables investment in improving the customer shopping trip.”

I tend to agree – it will be a long journey for management, staff and shareholders alike. I think that this will be the case across the sector, as it adjusts to the new normal of investing in price in order to win the once-loyal customers back from the so-called discounters.

The Foolish Bottom Line

It is entirely possible that the negative sentiment could turn; it is also true that the shares could benefit from increased volatility, currently felt elsewhere in the market, due to their perceived defensiveness and potential income stream.

However, it is no secret that the market is a challenging one, and retailers are having to fight hard for every pound of business from savvier shoppers. This, combined with other factors, could lead to dividend cuts – as we have seen with Tesco recently.

For those of us searching for yield, one of the best tried and tested methods is to adopt an approach towards a more diversified portfolio, tailored towards good solid income producing stocks - the sort that will make money whatever the weather.

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Dave Sullivan 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.