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One FTSE 100 stock I’d sell today and one I’d buy

One of the worst performing stocks in the FTSE 100 this year is takeaway delivery app Just Eat (LSE: JE). Year-to-date, the shares have declined by 16.2%, underperforming the FTSE 100 by around 10% excluding dividends. 

At the other end of the spectrum is retailer J Sainsbury (LSE: SBRY), which has seen its shares rise 33% so far in 2018. 

These two businesses couldn’t be more different, and the performance gap between the two is surprising. Old-fashioned, bricks and mortar Sainsbury’s has outperformed Just Eat, which is at the cutting edge of the technological revolution, by nearly 50% this year.

However, I believe the Sainsbury’s time in the sun is now coming to an end and it could be time for investors to reinvest their profits from this business into underperforming Just Eat.

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The reason why I think Just Eat is a better buy today is simple: valuation.

Investors have rushed to buy shares in Sainsbury’s as the company’s recovery has gained traction over the past 12 months. Management’s decision to try and merge the business with ASDA to create a UK retail behemoth has also helped improve sentiment. But the company’s underlying growth has not kept up with investor optimism. Analysts have pencilled in an earnings per share (EPS) expansion of 13% for 2019, which leaves the stock trading at a forward P/E of 15.1.

As my Foolish colleague Alan Oscroft recently noted, the UK supermarket sector is changing rapidly. Discounters Aldi and Lidl only have relatively small market shares and continue to expand fast, while larger players, such as Tesco are investing hundreds of millions of pounds to lure shoppers back into their stores.

Sainsbury’s has proven over the past few years that it can compete, but a valuation of 15 times forward earnings does not leave much room for disappointment. If earnings growth stalls, the shares could quickly erase all of this year’s gains.

A price worth paying 

Just Eat is also trading at a premium valuation (35 times forward earnings), but in my view, the firm deserves a higher rating. EPS are projected to expand 141% this year and 22% in 2019, giving a PEG ratio of 0.9 (anything below one indicates growth at a reasonable price). Meanwhile, the company is expanding overseas.

The cost of opening new offices around the world, as well as increasing investment here in the UK to improve its customer offering, has hurt investor sentiment. I believe the market is overreacting. While earnings may take a hit in the near term, the investment should pay for itself over the long term. 

Time to buy 

With this being the case, I believe recent weakness could present an excellent opportunity for long-term investors to buy into the Just Eat growth story.

Looking past short-term volatility, I believe the company’s strong position in the UK takeaway market is worth paying a premium for. And, unlike Sainsbury’s, Just Eat’s income is not at risk from low-cost German disruptors.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Just Eat. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.