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Is It Time To Dump J Sainsbury plc And Pile Into Ocado Group PLC And Greggs plc?

There comes a point with nearly every investment when it is the right time to sell up and reinvest elsewhere. Hopefully, this comes after superb profit gains and a whole heap of dividends but, all too often, it follows disappointment, losses and a bleak future.

When it comes to the question of whether now is the right time to sell Sainsbury’s (LSE: SBRY), it is the latter rather than the former which is most accurate. That’s because the supermarket’s share price has slumped by 29% in the last five years, during which time the likes of sector peers Ocado (LSE: OCDO) and Greggs (LSE: GRG) have soared by 167% and 152% respectively.

Looking ahead, the outlook for Sainsbury’s two food-focused peers remains very bright. In the case of Ocado, demand for online groceries is steadily rising and, with Ocado being synonymous with online grocery sales, it is well-placed to benefit from a consumer tailwind. Plus, the company is now being taken a lot more seriously by the investment community following its maiden profit and, looking ahead, it is forecast to increase net profit by 30% in the current year, followed by further growth of 45% next year.

Similarly, Greggs has become a much improved business in recent years, with its focus on core activities being a major step in the right direction. So, instead of seeking to move into different price points via premium coffee shops such as Greggs Moment, it has instead closed unprofitable stores, improved its food offering and gone back to basics in terms of offering simple, good value and honest food. As a result, its earnings are due to rise by 23% this year and by a further 6% next year.

The problem with Greggs and Ocado, though, is that their valuations appear to more than fully incorporate their upbeat forecasts. For example, Ocado trades on a price to earnings (P/E) ratio of 216, while Greggs has a P/E ratio of 21.5. And, while growth stocks do command premiums to the wider index, both stocks could quickly see their valuations come under severe pressure if their financial performance disappoints even to a relatively small extent.

Sainsbury’s, meanwhile, is struggling to even post positive net profit growth. Next year, for example, is due to see earnings flat-line and this would represent major progress following this year’s forecast fall in the company’s bottom line of 19%. However, Sainsbury’s appears to have a sound strategy of moving away from differentiating its offering based on price and instead trying to add value through superior own-brand products and improving customer service.

While its financial performance is relatively disappointing, Sainsbury’s has clear turnaround potential which could help to push its P/E ratio of just 12.7 considerably higher. Therefore, while Ocado and Greggs may be better businesses, Sainsbury’s appears to be the better investment.

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Peter Stephens owns shares of Sainsbury (J). 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.