Sales at J Sainsbury (LSE: SBRY) returned to growth over Christmas, with the supermarket reporting a 0.1% rise in like-for-like sales over the festive period. The news sent the group’s share price up by 6% during the first hour of trading this morning.
It may not sound like much of an increase, but Sainsbury’s sales fell by 0.4% over the same period last year. Investors may also be cheering news that like-for-like sales at Argos rose by 4% over the 15 weeks to 7 January. This lifts the group’s overall like-for-like sales growth to 1% — a respectable figure in a market where many retail sales are still falling.
Today’s figures confirm my view that last year’s acquisition of Argos owner Home Retail Group was a smart move.
These shares could hit 400p
I added Sainsbury shares to my portfolio during December. The share price has risen by about 10% since then, but I don’t think it’s too late to buy. In my view, Sainsbury continues to look good value for a number of reasons.
The group’s forecast dividend yield of 3.8% is the highest in the supermarket sector, while its forecast P/E of 13 is the lowest. This rating indicates that the market isn’t expecting Sainsbury to deliver much in the way of growth over the next year.
I’ve no way of knowing whether this is accurate, but I expect the group will return to growth over the next two or three years. One reason for this is that over the next three years, Sainsbury expects to achieve £160m of cost savings from combining the Argos and Sainsbury’s businesses. To put that into context, remember that these two companies generated a combined operating profit of £830m last year. These savings could lead to a worthwhile improvement in profit margins.
In my view, buying at today’s relatively undemanding valuation should mean that the risk of losing money is limited. I believe there’s scope for Sainsbury’s share price to reach 400p over the next few years, and continue to rate the stock as a buy.
A potent small-cap pick?
Premium drinks producer Stock Spirits Group (LSE: STCK) has been a strong performer over the last year, climbing by 46% in 12 months.
The group’s spirits and liqueurs are sold in Central and Eastern Europe. In a year-end trading update today, Stock Spirits said its business had performed well in the fast-growing Polish vodka market. This is a key area of interest for investors, as the group struggled against cut-price competitors in Poland in 2015, and had to issue a profit warning. The share price has only just returned to the level seen before that profit warning.
Today’s statement confirmed that full-year profits for 2016 are expected to be in line with expectations. This give the stock a forecast P/E of 18, with an ordinary dividend yield of about 3.3%. Earnings are expected to rise by 10% to €0.13 per share in 2017, giving a forecast P/E of 16 for the current year.
In my view, Stock Spirits remains a potential buy at current levels. The group appears to have returned to growth and seems to be trading well. If you’re looking for growth buys, you may want to take a closer look.
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Roland Head owns shares of J Sainsbury. 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.