Is J Sainsbury plc or Lloyds Banking Group plc the best recovery play on today’s market?

Recent years have been tough for a host of big FTSE 100 names, including grocery giant J Sainsbury (LSE: SBRY) and banking behemoth Lloyds Banking Group (LSE: LLOY). Is the fightback about to begin?

Food, inglorious food

These have been dire times for the entire grocery sector and Sainsbury’s is no exception. Its share price is 24% lower than it was five years ago, trailing the FTSE 100 markedly, which is up nearly 8% over the same period. Still, things could be worse, it could have been Tesco, which is down 60% over the same period. In relative terms Sainsbury’s doesn’t look so bad, and its share price has held firm over the last year.

The reasons supermarkets are struggling have been well-rehearsed: stagnant wages, disgruntled customers, budget rivals and costly price wars. The sector continues to struggle this year, with Sainsbury’s recently reporting a 0.8% drop in like-for-like retail sales. Chief executive Mike Coupe said market conditions remained “challenging”, as food price deflation hits sales and pricing pressures look set to continue.

Wafer-thin margins

Coupe is tired of living off the thin gruel presented by food margins, and is hungry to turn Sainsbury’s into a “multi-channel, multi-product and services retailer”. General merchandising and clothing has been more rewarding lately, while Sainsbury’s Bank offers long-term growth opportunities.

The big question hanging over the business is how successfully will it integrate Argos-owner Home Retail, assuming it secures competition authority approval? Analysts are split down the middle, with some seeing this as a great synergy opportunity, while others fail to see the join. This could be make or break for Coupe, and for Sainsbury’s. Trading at 10.2 times earnings, some of the risk is priced-in. You also get a reasonable forward yield of 4.3%. Unfortunately, the Sainsbury’s recovery is far from baked-in. 

Bashed banks

Lloyds Banking Group has fared worse over the past year, with its share price down almost 20% in that time. Yet it has also outperformed its peers, with HSBC Holdings falling 27%, Barclays down 32%, and Royal Bank of Scotland Group off a gruesome 36%.

Lloyds has been my pick of the banks for the past couple of years, so at least I backed the right horse, even if it’s heading in the wrong direction. Naturally, I had expected it to do better than this, especially as the prospect of a juicy yield move steadily closer. Currently, Lloyds yields a steady 3.3%, but that’s forecast to hit 6.3% by the end of this year, and 7.3% by December 2017.

Let it flow

I would have thought the prospect of locking-into such a generous flow of dividends would have investors slavering at the mouth, but wider economic worries have quenched their appetites. Lloyds is exposed to a slowing UK economy, and the shadow of Brexit. UK house prices may finally have peaked, due to the tax crackdown on buy-to-let and growing affordability issues among overstretched buyers.

Trading at 8.1 times earnings, I still think that Lloyds is a great recovery play, especially if Brexit throws up an even cheaper buying opportunity than today’s 69p.

Both of these companies will sit nicely in a long-term portfolio of growth and income stocks.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.