MENU

Why I’d Buy WM Morrison Supermarkets PLC, Hold McColl’s Retail Group PLC And Sell Ocado Group PLC

Grocery shopping has never been so easy. In fact, these days there are three main means through which you can purchase food in the UK. The first is by going to a supermarket and buying everything in one go, with most people choosing to do so once per week. This is the area in which Morrisons (LSE: MRW) will focus its efforts in future as it seeks to turn its disappointing performance around.

Certainly, Morrisons is enduring a challenging period and its moves into other means of selling groceries (mentioned below) have thus far proven to be unsuccessful. However, by stripping the company back to its core ingredients; namely good, honest food with a significant amount of vertical integration in the supply chain, Morrisons is likely to reconnect with its customer base. Furthermore, such a move should help it to win over lost customers from the likes of Aldi and Lidl, with those customers now enjoying a real terms rise in spending power for the first time in a number of years.

With Morrisons trading on a price to earnings growth (PEG) ratio of just 0.7, it appears to have a sufficiently wide margin of safety to warrant purchase. While its medium term future may be rather uncertain, its shift towards its core activities could provide a significant boost to profitability over the long term.

The second means of purchasing groceries is through convenience stores. These are perfect for smaller basket sizes and the major retailers have realised that many people undertake such shops in addition to a larger weekly shop at a supermarket. As such, they have expanded rapidly into this space, leaving more established players such as McColl’s (LSE: MCLS) with greater competition.

This is at least partly responsible for the company’s low earnings growth rate, with McColl’s forecast to post a rise in its bottom line of just 1% this year followed by a fall of 3% next year. While disappointing, McColl’s continues to trade at a very low price, with it having a price to earnings (P/E) ratio of just 8.9. This, plus a yield of 7.2% which is covered 1.5 times by profit, indicates that the company’s shares could be worth buying. However, with such a large amount of competition, it may be prudent to wait for an upturn in the wider industry outlook before piling in.

The third means of buying groceries is online. Of course, Ocado (LSE: OCDO) is usually the first name which springs to mind among investors when it comes to online grocery shopping. Encouragingly, Ocado is now a profitable entity and is forecast to increase its bottom line by 53% in the current year and by a further 45% next year.

While hugely impressive, Ocado’s valuation appears to adequately price in such strong growth. For example, it has a P/E ratio of 184 and a PEG ratio of 2.9. Both of these figures indicate that while online grocery shopping is likely to grow in popularity and Ocado is well-placed to benefit, its shares appear to be fully valued.

Of course, finding great value stocks is never an easy task. That's why The Motley Fool has written a free and without obligation guide called 7 Simple Steps For Seeking Serious Wealth.

It's a step-by-step guide that could make a real difference to your portfolio returns in 2016 by helping you to find the best stocks at the lowest prices.

Click here to get your copy - it's completely free and comes without any obligation.

Peter Stephens owns shares of Morrisons. 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.