2016 has got off to an interesting start for investors in Sainsburys (LSE: SBRY), with the supermarket chain announcing that it made a bid for Argos and Homebase owner Home Retail in November 2015. With the bid having been rejected, Sainsburys has until 2 February to make a formal bid under UK takeover rules and is said to be considering its position.
Clearly, the deal would diversify Sainsburys product offering and would fly in the face of the strategies adopted by a number of its supermarket peers. Tesco and Morrisons are seeking to simplify their business models and return to being more focused supermarkets. Both companies are in the process of disposing of assets thatarent part of their core supermarket offering.
If Sainsburys does bid for Home Retail, this could complicate the companys strategy at a time when the supermarket industry continues to endure a difficult period. That said, Home Retail trades on a relatively appealing valuation and, if integrated successfully, could positively catalyse Sainsburys growth outlook.
Of course, if a deal isnt agreed, Sainsburys has a valuation indicating that 20% upside is very much on the cards, with it trading on a price-to-earnings (P/E) ratio of just 11.2 at the present time.
In fashion
Also having the potential to post 20% returns this year is Ted Baker (LSE: TED). It has today confirmed the purchase of a building in London thathas served as its head office and, looking ahead, it seems to be well-positioned to continue the stunning earnings growth rate of recent years.
In fact, Ted Bakers bottom line is due to rise by 20% in the current year and by a further 16% next year. Therefore, an upward rerating may not be necessary in order for it to record 20% gains this year if the company can meet its current forecasts. And with earnings having grown at an annualised rate of 20.5% during the last five years, current guidance appears to be very achievable given the positive recent update thatshowed excellent performance across all channels and territories.
Growth potential
Meanwhile, shares in Sports Direct (LSE: SPD) could also be 20% higher than their current level come the end of the year. Thats because Sports Direct trades on a price-to-earnings growth (PEG) ratio of just 1. This indicates that a mix of double-digit earnings growth as well as the potential for an upward rerating could lead to a major turnaround in the companys share price performance following its 31% decline of the last three months.
Certainly, there are question marks over Sports Directs expansion into Europe with writedowns having been made due to poor sales figures. However, with the UK economy moving from strength-to-strength and UK consumers enjoying real-terms rises in their incomes, the outlook for retailers such as Sports Direct still appears to be highly positive for 2016. And while its shares could remain volatile, they appear to have 20% upside potential over the medium term.
Peter Stephens owns shares of Morrisons, Sainsbury (J), and Tesco. The Motley Fool UK has recommended Sports Direct International. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
