Why 1% sales growth makes J Sainsbury plc a buy for me

Roland Head reviews today’s sales figures from J Sainsbury plc (LON:SBRY) and explains why he believes the shares are still cheap.

| 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.

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.

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.

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.

More on Investing Articles

Investing Articles

Is passive income possible from just £5 a day? Here’s one way to try

We don't need to be rich to invest for passive income. Using the miracle of compounding, we can aim to…

Read more »

Middle-aged black male working at home desk
Investing Articles

If an investor put £20k into the FTSE All-Share a decade ago, here’s what they’d have today!

On average, the FTSE All-Share has delivered a mid-single-digit annual return since 2014. What does the future hold for this…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

One FTSE 100 stock I plan to buy hand over fist in 2025

With strong buy ratings and impressive growth, this FTSE 100 could soar in 2025. Here’s why Mark Hartley plans to…

Read more »

Investing For Beginners

If a savvy investor puts £700 a month into an ISA, here’s what they could have by 2030

With regular ISA contributions and a sound investment strategy, one can potentially build up a lot of money over the…

Read more »

artificial intelligence investing algorithms
Investing Articles

2 top FTSE investment trusts to consider for the artificial intelligence (AI) revolution

Thinking about getting more portfolio exposure to AI in 2025? Here's a pair of high-quality FTSE investment trusts to consider.

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Do I need to know how Palantir’s tech works to consider buying the shares?

Warren Buffett doesn’t know how an iPhone works. So why should investors need to understand how the AI behind Palantir…

Read more »

artificial intelligence investing algorithms
Investing Articles

Can investors trust the National Grid dividend in 2025?

National Grid surprised investors this year with a dividend cut to help fund upgrades. Is this FTSE 100 stalwart still…

Read more »

Micro-Cap Shares

3 high-risk/high-reward penny stocks to consider buying for 2025

These three penny stocks are risky. But Edward Sheldon believes they have the potential to be excellent long-term investments.

Read more »