High-street baker Greggs (LSE: GRG) has undoubtedly been a superb investment over the last year. The shares have risen by 130% and Greggs has managed to deliver real growth while remaining debt-free.
But even the best companies are only good investments at the right price, and I reckon Greggs is beginning to look a bit pricey.
A supermarket alternative?
In this article, Ill explain why I think it could be a good time to invest in a less popular stock J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US).
1. Low expectations, low price
The big supermarkets are certainly under pressure, slashing prices and profits in a price war thats being driven by the success of Aldi and Lidl. Yet Sainsbury is doing better than expected.
Its recorded a modest decline in sales, which fell 2.1% during the first quarter of this year, for example. Yet when the effects of price cuts are stripped out, this suggests to me that Sainsburys customers are remaining loyal to the store.
The firms formula of superior quality own brand goods at a slightly higher price appears to be working, for now at least.
Sainsbury currently trades on 12 times forecast earnings, with earnings expected to remain flat in 2016/17. These forecasts suggest expectations are low, opening the door to gains if Sainsbury does manage to outperform.
In contrast, my view of Greggs is that a 2016 forecast P/E of 22 suggests this stock is already priced to perfection. Earnings per share growth is expected to fall from 17% in 2015 to just 7% in 2016.
I dont see the logic in buying Greggs now and would reduce the size of my holding if I was a shareholder.
2. The Sainsbury discount
Sainsburys forecast P/E of 12 puts it at a notable discount to Tesco and Wm Morrison Supermarkets, as these figures show:
Supermarket |
2016 forecast P/E |
Price/book ratio |
Sainsbury |
12.5 |
0.9 |
Morrison |
16.4 |
1.2 |
Tesco |
23.7 |
2.4 |
Why is this? Tesco may have some long-term advantages, as the largest supermarket in the UK, but I cant see a good reason for Sainsbury to be this much cheaper than its peers.
One possible explanation is the fact that Sainsbury and Morrison are the most heavily-shorted stocks in the FTSE 100. More than 15% of each firms stock is on loan to shorters, according to financial information service Markit.
As long ago as last October, Sainsbury was the most shorted stock in the index. This will have helped to push down its share price, but could trigger gains if the shorts decide to lock in some profits, as theyll need to buy shares to reduce their short positions.
Of course, its worth remembering that the shorters could be proved right. Supermarkets could have further to fall.
3. Income attractions
The final point in favour of Sainsbury is that despite cutting its dividend, it offers an attractive 3.5% prospective yield. Thats significantly higher than Greggs prospective yield of 2.2%.
While Greggs does have the advantage of net cash and no debt, Sainsbury has lower gearing than Tesco or Morrison, and I dont see its debt levels as a major concern.
Greggs or Sainsbury?
Ultimately, its your choice. Growth and momentum investors will probably stick with Greggs, while value hunters might be more tempted by Sainsburys shares, which currently trade slightly below their net tangible asset value, a classic value buy signal.
In either case, I’d urge you to read “3 Hidden Factors Behind This Daring E-commerce Play” before you make any trading decisions on UK retailers.
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Roland Head owns shares of Wm Morrison Supermarkets and Tesco. The Motley Fool UK owns shares in Tesco. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.