The J Sainsbury (LSE:SBRY) share price is down 4.5% on Friday (11 October). But this isn’t because of anything wrong with the underlying business.
The reason is that its largest investor has made a significant sale at a discount to the stock’s previous level. So could this be an opportunity for investors looking to buy the stock?
Discount selling
Sainsbury’s largest shareholder is the Qatar Investment Authority (QIA). And the firm decided to dispose of 109m shares in the UK supermarket chain at a price of £2.80 each.
That’s around 4% of the company’s outstanding share count. And the price implies a discount of roughly 3% to Thursday’s closing price.
News that a major shareholder is looking to sell generally doesn’t fill investors with confidence about a company. As a result, the shares have been falling.
It’s not obvious to me that there’s anything wrong with the underlying business, though. So this might be the moment for anyone who has been waiting for an opportunity to buy.
Surprisingly good
Sainsbury operates in an intensely competitive industry – customers are largely driven by price and Aldi and Lidl are a significant threat. Plus Tesco has a much larger market share. And that’s not going to change any time soon.
Nonetheless, the business has been performing well. In the first six months of its financial year, retail sales grew almost 8% with grocery sales up 10%.
This indicates that Sainsbury is defending its position well against the budget retailers. And while earnings per share fell slightly, the company maintained its dividend.
Looking ahead, the firm expects to generate at least £500m in free cash flow this year. Based on the current £6.5bn market cap, that implies a 7.6% return – that looks pretty good to me.
Why is QIA selling?
Given all this, the obvious question is why the QIA share sale happened. I don’t know what the answer is, but a couple of things stand out to me.
One is that the firm still has a significant stake in Sainsbury. It owned around 15% of the total company before the sale, so disposing of around 3% still leaves it with a substantial investment.
Another is that the purpose of the QIA is to diversify Qatar’s economy. As a result, the sale might just be to help reduce portfolio risk by investing elsewhere.
It’s not obvious to me that the sale – or the market’s reaction to it – is anything that ought to cause investors to rethink their view on Sainsbury. But there’s an important lesson here.
Investing in shares
It’s important that investors have their own ideas about the stocks they choose to buy. And that means having a clear view of why they’re optimistic about the underlying business.
Whether it’s Warren Buffett or the QIA, copying someone else is a bad idea. They might sell at any time for reasons that are entirely their own – and they’re entirely justified in doing so.
Sainsbury’s doesn’t jump out at me as a business I want to own. But if I were someone who had a more positive view on the company, I’d see the falling share price as an opportunity and would consider it.
