Are these FTSE 100 bargains too good to be true?

For those seeking to get in on the British supermarket sector it could be argued that J Sainsbury (LSE: SBRY) is the most attractive destination at present.

For the period to March 2017 the London chain deals on a P/E ratio of just 12.2 times. This reading beats Tesco’s forward multiple of 28.7 times, as well as Morrisons’ equivalent ratio of 21.5 times.

Without doubt the entire grocery sector faces huge challenges in the months and years ahead, and the more attractive valuations at Sainsbury’s leave it less susceptible to a crushing share-price collapse, at least in theory. But this is in itself not reason enough to invest, of course, and particularly as sales data continues to slide.

Latest Kantar Worldpanel numbers, for example, showed till activity at Sainsbury’s down 0.7% during the 12 weeks to November 6. This pushed the company’s market share to 16.3% versus 16.6% a year earlier.

The supermarket may have to embark on further rounds of price-cutting to attract shoppers back through its doors. This is particularly worrying as margins are already under huge pressure, and are likely to come under further attack should Brexit troubles continue to dent sterling and encourage more and more suppliers to hike what they charge Sainsbury’s to stock their goods.

Fashion victims

And the outlook for Britain’s clothes sellers like Next (LSE: NXT) and Marks & Spencer (LSE: MKS) isn’t much brighter either, even if retail data has been more cheery of late.

BDO announced at the weekend that like-for-like sales in the fashion segment grew by 1.5% in November, the first increase since January. But the researcher warned that buoyant consumer appetite amid better-than-expected economic data may be about to fizzle out.

Indeed, BDO head of retail and wholesale Sophie Michael warned that “we’re facing a year of unprecedented political, social and economic uncertainty both at home and overseas.” She added that “the challenges facing retailers continue to mount, which will inevitably impact on retailers’ costs and consumers’ disposable incom. The question is ‘when’ not ‘if’ the spending squeeze will come.” 

Britain’s retailers are already having a tough time of it as they’re having to embark on heavy discounting to separate shoppers from their cash, not to mention cope with an increasingly-competitive marketplace.

Next has already slashed its profit forecasts more than once in 2016, and advised in September that sales of its full-price items slipped 1.5% between January and October.

And things are much worse at Marks & Spencer as its many attempts to reinvigorate its fashion ops keep on failing. It most recently saw like-for-like sales of its clothes and home products falling 5.9%

Like Sainsbury’s, both firms deal on P/E ratios well below the FTSE 100 forward average of 15 times, suggesting the risks facing each business are factored into the share price. Next deals on a forward P/E reading of 11 times for the current period, while its high street rival changes hands on a ratio of 11.9 times.

I don’t share this train of thoug in however, and reckon all three retailers are in danger of searing earnings downgrades as difficult trading conditions look set to become still tougher. I reckon shrewd investors should give these businesses a wide berth.

Avoid these rookie mistakes

But Sainsbury’s et al haven't always been basket cases. Indeed, their flagging fortunes illustrate how even the biggest companies can turn from stock stars to doomed duds in the blink of an eye.

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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.