Why I’d avoid Sainsbury’s and buy this superstock instead
The supermarket’s chief executive Mike Coupe has been prominent among the UK’s big retail bosses in warning that a no-deal Brexit and trading under World Trade Organisation terms would increase food prices, cause significant disruption, and could put national food security at risk.
Meanwhile, Wetherspoon’s Brixiteer boss Tim Martin has lauded the prospect of a clean break from the EU and free trade, on the grounds it would reduce shop and food prices and be good for his customers.
Whatever the ultimate terms of the final divorce decree and economic repercussions, I’m convinced Sainsbury’s is a stock to avoid, while I’d happily buy Wetherspoon’s shares today, and hold them for the long term. Here’s why.
Sainsbury’s has been struggling for a good number of years now. I was unconvinced by its acquisition of Argos in 2016. This upped its exposure to discretionary consumer spending which, from an investment perspective, is not really what I want from a defensive sector like food.
Its announcement last year of an agreed merger with Asda was more promising in this respect. However, as I warned readers, there was a chance the competition regulator would block it, and that even if it did go ahead, I would view it as fraught with execution risk. It now looks like the merger is unlikely to happen.
Recent news flow around Sainsbury’s has been ominous. Kantar Worldpanel’s regular grocery market survey showed its sales falling 1% over the 12 weeks to 24 February, while Tesco, Asda and Morrisons saw rises of 1.3%, 1% and 0.8%, respectively. Sainsbury’s launched a discount across its TU clothing range last month, followed by a massive sale this week across its homewares brand, Habitat.
At a current share price of 227.5p, Sainsbury’s price-to-earnings (P/E) ratio is 11.2 and its dividend yield is 4.5%. I view this as unattractive for a struggling business, with no clear route to being a sector winner.
Premium worth paying
In today’s half-year results, Wetherspoon reported a 7.1% rise in total sales for the six months ended 27 January, including a like-for-like increase of 6.3%. Growth has accelerated in the six weeks to 10 March, with total sales up 10.9% and like-for-like sales up 9.6%.
However, margins are under pressure from increased staff pay and other costs. As a result, first-half pre-tax profit declined 18.9%. The company reiterated its previous guidance that costs in the second half of the year will be higher than those of the same period last year, and that it “anticipates an unchanged trading outcome for the current financial year.”
The market took today’s news in its stride, with the shares currently trading little changed from yesterday at around 1,300p. This puts the company on a P/E of 17.1, and with its routinely small dividend giving a yield of just 0.9%.
However, I believe the premium rating is worth paying because I view Wetherspoon’s position in the value pub market as akin to Primark’s in budget clothing — a clear ‘category killer’, in the words of one City analyst. As such, I expect it to be a long-term winner.
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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.