Are Banco Santander SA & J Sainsbury plc Good Companies In Bad Sectors?

Harvey Jones looks at the good and bad in Banco Santander SA (LON: BNC) & J Sainsbury plc (LON: SBRY)

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

A bad company in a bad sector is clearly one to avoid, because everything is against it. A bad company in a good sector is arguably worse, because it has no excuses. But a good company in a bad sector? That’s tricky. 

The Good Banker

Santander (LSE: BNC) has a double problem. The eurozone’s biggest bank is undoubtedly in a big, bad sector. Its problems are magnified because it is heavily exposed to Brazil, its second biggest market, which generates around one fifth of its earnings. The country is perilously close to sliding into outright depression, Goldman Sachs warns, as it fights inflation, a rising public deficit, plunging commodity prices, endemic corruption and political gridlock. Santander’s profits have been further hit by the fall in the Brazilian Real, and fears over rising loan impairments.

Things are better in Spain, its third biggest market, as the local economy picks up, with help from ECB monetary easing. The worry is that low interest rates are allowing zombie businesses and personal creditors to roll over unpayable debts, and defaults could soar when interest rates finally rise. The UK is now Santander’s biggest and most profitable market, thanks to the success of products such as the popular 123 current account, which won 960,000 customers in nine months.

Santander can hardly be described as a good bank, given that it announced a major fundraising and dividend cuts in January. It is also exposed to at least one bad sector, arguably two. There may still be good reasons to invest, however. Its valuation looks undemanding at 10.1 times earnings. The dividend may have been slashed earlier this year but it is forecast to yield 4.3% by the end of 2016. Earnings per share should rise a steady 5% next year. A good prospect, but not great.

The Good Grocer

The supermarket sector is bad for established players, although young bloods Aldi and Lidl are thriving. Tesco and MW Morrison have had very bad years, the latter dropping out of the FTSE 100. J Sainsbury (LSE: SBRY) has done better, aided by its relatively upmarket status. Its share price is actually up 5% this year, against a 13% drop at Tesco and 19% at Morrisons. 

In November, Sainsbury’s became the first major supermarket to increase market share for over a year. OK, it only increased share by 0.2 percentage points, lifting its market share to 16.6%, but that is a good performance in a bad environment. Sales grew 1.5%, and Sainsbury’s has high hopes for Christmas, where it traditionally does well, due to its focus on food. So there is hope that good could soon taste even better.

I always thought Sainsbury’s was unfairly hit by the supermarket sell-off. Its share price was stagnating even when it posted 36 consecutive quarters of sales growth. Yet I reckon UK groceries are still a bad place to be, given shifting shopping trends and the rise of the discounters. Sainsbury’s was forced to slash its dividend earlier this year, but is still on a forward yield of 4.4%. This is a bad sector, sadly, which outweighs much of the good at Sainsbury’s.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones 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.

More on Investing Articles

Young black man looking at phone while on the London Overground
Value Shares

After a 16% drop, FTSE 100 stock JD Sports Fashion looks like a steal to me

This FTSE 100 stock has tanked since mid-September. Edward Sheldon believes that there's value on offer after the share price…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Is now the time to buy BP shares? Here’s what the charts say

The best time to buy shares in a company is when they’re trading at a discount. But the future is…

Read more »

Investing Articles

Here’s how I’d use £50K to aim for a million when the stock market crashes

Seeing a stock market crash as a buying opportunity could prove lucrative for a well-prepared, long-term investor. Christopher Ruane explains…

Read more »

Stack of one pound coins falling over
Investing Articles

It’s up 27% with a P/E of 9! I’m considering the potential of this blossoming penny stock

Despite several years of losses, this UK penny stock has an impressive valuation. I’m looking to see if it could…

Read more »

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »