Yesterday, the FTSE 100 index fell by another 4%, at one point trading below 5,000 points. This adds to the already dismal 2020 performance, with the index down over 30%.
Yet amidst this gloom, there are some firms that are holding their ground. The one that stood out for me yesterday was J Sainsbury (LSE: SBRY). The giant supermarket chain actually rose by 0.5% yesterday. This would not be that impressive during a normal trading day, but given that the vast majority of firms in the index fell, posting any kind of gain is a big deal.
The past
Before I get into the reasons I like Sainsbury’s today, I should first address the elephant in the room. In November last year (the latest trading update we have), it said half-year profit dropped a staggering 92%. Revenue stayed broadly flat, and we saw a £229m write-down in the value of the property portfolio of the business.
As a result, the share price has since struggled to make a meaningful move higher. This compounded a longer-term trend of a slowly falling share price over the past decade. When you add in the market-wide sell-off the past month, it has put the share price at a 20-year low.
Any firm with a share price at a two-decade low is not an immediate buy, I get that. But there are still several reasons I would strongly consider buying it.
The present + future
A key reason is current consumer demand. The products it stocks are in demand as consumers stock up on everything from toilet paper to tinned food. That means empty shelves across the country. With Sainsbury’s being one of the big four supermarkets (it had a share last year of 15.9%) this is good for the business. When half-year 2020 results come through, I would bank on a spike in profits.
But we like to think long term here at The Motley Fool and would not suggest buying a share on a short-term trend.
So my second reason is future consumer demand. We have been riding the longest bull market in history over the past decade. Supermarkets like Sainsbury’s have had a tough time as more upmarket rivals Waitrose, cheaper rivals like Aldi and Lidl, and online grocer Ocado take market share. Whether the coronavirus is a catalyst for a recession or not remains to be seen. But I do know that the bull market is coming to a close.
When we do see a recession, supermarkets are a defensive sector that should still perform well during a downturn as they sell essentials. Ultimately, the demand for most of its products is constant due to them being necessities, not treats (although it sells those too). This provides a baseline of revenue for a firm like Sainsbury’s, even when the broader economy is struggling.
So would I buy it at 20-year lows? Well, if I believe in its potential, I have to buy-in somewhere. I’d much rather buy it on the cheap with a P/E ratio of 9.4 than have to pay over the odds for it at 15 or 20 times earnings.
