Right when it felt as though things couldnt get much worse for investors in Tesco (LSE: TSCO), the company announced that an accounting error had caused profit to be overestimated by around 250 million.
As youd expect, shares in the company have fallen heavily (upwards of 10%) since the announcement. Furthermore, sector peerSainsburys (LSE: SBRY) has also seen its share price drop by 6% in the wake of Tescos announcement and in the midst of a weak wider market.
For investors in Sainsburys, though, the future still looks bright and the drop in its share price (which is at least partly caused by its rivals announcement) means that a buying opportunity could be on offer. Heres why.
A Sound Strategy
Sainsburys has a new strategy through which it hopes to mount a sustained fight back against no-frills supermarkets such as Aldi and Lidl. Indeed, it recently announced a joint venture with Danish retailer Netto that will allow it to compete with discount retailers on the one hand, and leave the Sainsburys brand to fight the higher price point food retailers such as Waitrose.
This strategy is essentially a split of the Sainsburys brand and seems to be a more sensible option than attempting to compete on price, as the likes of Tesco have done. It avoids the dilution of the Sainsburys brand, which has taken a long period of time to build into a respectable, quality name.
An Improving Economic Outlook
The Sainsburys brand should have a more prosperous future than it has experienced in the recent past. With inflation being higher than wage growth for a number of years, it is unsurprising that shoppers are feeling the pinch. However, with wage rises set to be ahead of inflation through 2015, shoppers could have higher disposable incomes and seek out better quality products and a higher level of service, thereby returning to shop at Sainsburys from Lidl and Aldi, for instance. This would clearly be good news for Sainsburystop and bottom lines.
Although Tesco has overstated profit by a considerable amount, there is nothing to suggest that this is a sector-wide problem. Yet, Sainsburysshares have fallen heavily since the news. This creates an opportunity for brave investors who are comfortable with a degree of volatility moving forward.
With Sainsburys currently trading on a price to earnings (P/E) ratio of just 9.4 and yielding 5.8%, it appears to offer great value and huge income potential. Certainly, there will be lumps and bumps ahead, with the latest data from Kantar showing that its market share has slipped from 16.6% to 16.2%. However, with a sound strategy, an improving macroeconomic outlook, low share price and well-covered dividend, Sainsburys could prove to be a great long-term buy.
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Peter Stephens owns shares of Tesco and J Sainsbury. The Motley Fool owns shares in Tesco.