Is J Sainsbury plc A Better Buy Than Dunelm Group plc And Home Retail Group Plc?

Should you buy J Sainsbury plc (LON: SBRY) instead of fellow UK-focused retailers Dunelm Group plc (LON: DNLM) and Home Retail Group Plc (LON: HOME)?

| 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.

It’s been a hugely disappointing year for Sainsbury’s (LSE: SBRY) (NASDAQOTH: JSAIY.US), Dunelm (LSE: DNLM) and Home Retail (LSE: HOME), with the three UK-focused retailers seeing their share prices decline significantly during the period. In fact, Sainsbury’s has seen its share price fall by 14%, while Dunelm and Home Retail have slumped by 13% and 24% respectively, as investor sentiment has declined for all three companies.

Looking ahead, though, which of the three has the brightest prospects and, crucially, offers the best value at the present time?

Growth Potential

For investors in Sainsbury’s, things are about to get worse before they get better. In fact, even though the supermarket has shifted its pricing strategy to generate higher margins on its own branded products, its bottom line is still set to fall in the current year by 14%, as a challenging outlook for the wider sector still harms its sales and profitability. And, looking ahead to next year, Sainsbury’s is only expected to deliver a slightly improved performance, with net profit forecast to rise by just 1% in 2016, which means that investors in the company may have to wait a while before investor sentiment begins to pick up strongly over a prolonged period.

Should you invest £1,000 in Dunelm right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Dunelm made the list?

See the 6 stocks

Meanwhile, Dunelm and Home Retail have much brighter near-term futures when it comes to earnings growth. For example, Dunelm is expected to increase its bottom line by 8% next year and by a further 9% the year after. This is slightly higher than the wider market’s growth rate and shows that Dunelm looks set to benefit from an improving outlook for the UK consumer, as wage rises are due to beat inflation for the first time since the start of the credit crunch.

Similarly, Home Retail is forecast to increase its earnings by 6% in the current year, followed by 7% next year. This is also an impressive outlook and means that investor sentiment in both stocks is likely to be stronger than for Sainsbury’s.

Valuation

However, the problem with Dunelm and Home Retail is that their bright futures appear to be more than adequately priced in to their present valuations. In other words, they seem to be rather richly valued. For example, Dunelm has a price to earnings (P/E) ratio of 20.2, which equates to a price to earnings growth (PEG) ratio of 2.3. Similarly, Home Retail has a PEG ratio of 2.3, which indicates that its shares may not perform as well as its investors are hoping for over the medium term.

In Sainsbury’s case, however, its P/E ratio of 12.2 appears to be relatively appealing when the FTSE 100 has a P/E ratio of around 16. Furthermore, and despite the prospects for asset write-downs over the next couple of years, Sainsbury’s still trades at a discount to net asset value (it has a price to book (P/B) ratio of just 0.8) and this indicates that its share price could move significantly higher in the medium to long term.

Looking Ahead

So, while the last year has been very disappointing for its investors, Sainsbury’s still offers significant upside. Certainly, it may take time to come good but, to a far greater extent than Dunelm and Home Retail, its shares offer excellent value for money and seem to be worth buying at the present time.

Should you invest £1,000 in Dunelm right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Dunelm made the list?

See the 6 stocks

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.

Peter Stephens owns shares of Sainsbury (J). 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

Blue NIO sports car in Oslo showroom
Investing Articles

Tesla’s struggling. Could NIO stock benefit?

NIO stock has moved up very slightly this year, while Tesla has crashed. Our writer considers whether it might be…

Read more »

Two employees sat at desk welcoming customer to a Tesla car showroom
Investing Articles

Could Tesla stock be a brilliant bargain in plain sight?

Christopher Ruane sees some things to like about Tesla, but as its vehicle revenues have gone into sharp decline, is…

Read more »

British coins and bank notes scattered on a surface
Investing Articles

3 cheap FTSE 250 stocks with big dividends to consider buying right now

The FTSE 250's loaded with so many big dividend yields it's hard to know where to start. These three have…

Read more »

Rolls-Royce's Pearl 10X engine series
Investing Articles

Up 585%, could Rolls-Royce shares still go higher?

Christopher Ruane likes the Rolls-Royce business but is not so convinced by the value its current share price offers him.…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

I reckon a bull market’s coming! Here’s what I’m buying for my Stocks and Shares ISA

Hoping to capitalise on what he believes is an undervalued UK stock market, our writer’s added more of this FTSE…

Read more »

piggy bank, searching with binoculars
Investing Articles

The UK stock market looks undervalued to me. Here’s 1 growth stock to consider for a SIPP

Our writer explains why he thinks the UK stock market’s currently in bargain territory, and identifies one share potentially worthy…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Meet the FTSE 100 stock I’ve been buying this week

Despite a strong week for the FTSE 100, one stock fell 7% in a day. And Stephen Wright took the…

Read more »

Businesswoman calculating finances in an office
Investing Articles

1 of my favourite growth stocks crashed 20% in a day this week. Here’s what I’m doing

Stephen Wright thinks the market’s overreacting to short-term growth challenges in one of his favourite UK stocks, creating a buying…

Read more »