With the outlook for the UK economy being highly uncertain, it may feel like the wrong time to buy shares in a UK-focused supermarket such as Sainsbury’s (LSE: SBRY). As we saw in the credit crunch, when consumers are squeezed they trade down to lower-cost items and lower-cost stores such as Aldi and Lidl. As a result, Sainsbury’s struggled in the last recession.
However, Sainsbury’s is better prepared today than it was back then. It has a more efficient supply chain and is better able to differentiate itself from no-frills rivals. Furthermore, its share price performance will be highly dependent on the integration of Argos owner Home Retail. If the amount of synergies and cross-selling opportunities are in line with expectations, then Sainsbury’s could see its bottom line rise at a rapid rate and this could positively impact investor sentiment.
With Sainsbury’s trading on a price-to-earnings (P/E) ratio of just 11, it seems to offer a wide margin of safety. Therefore, while its earnings have fallen significantly in recent years, it could be at the start of a strong turnaround.
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Upside potential
Also experiencing a difficult period has been Glencore (LSE: GLEN). Falling commodity prices hurt its bottom line and this put pressure on its ability to repay borrowings in the eyes of many investors. This caused a weakening in investor sentiment, with Glencore adopting a strategy through which to reduce its balance sheet risk and provide a more sustainable and less risky long-term growth plan.
This plan is progressing relatively well, with asset disposals and cost-cutting making Glencore a leaner and more efficient business. While its financial performance is still highly dependent on the price of commodities, its margin of safety indicates that it offers a favourable risk/reward ratio.
For example, Glencore trades on a price-to-earnings growth (PEG) ratio of 0.7 thanks to a forecast rise in its earnings of 46% next year. While its shares are likely to be volatile, they offer significant upside potential.
Take a closer look?
Meanwhile, B&Q owner Kingfisher (LSE: KGF) has endured a difficult 2016. Its share price may be flat year-to-date but fears surrounding the impact of Brexit on the UK economy as well as doubts about the growth rate of the French economy have caused its shares to be exceptionally volatile.
Looking ahead, Kingfisher is expected to increase its earnings by just 4% in each of the next two years. While that’s below the growth rate of the wider market, Kingfisher continues to have a strong balance sheet as well as international exposure that could benefit from a continued weakening in sterling. Furthermore, it remains a sound income option, with its dividend being covered 2.1 times by profit and it yielding 3.2%.
As such, for investors seeking a well-diversified, financially strong and sound income play, Kingfisher could be worth a closer look following its 8% fall in the last year.
