This report is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.
Last year we produced a report looking at the UK’s supermarkets – at the time struggling with the rise of discounters like Aldi and Lidl. Tesco stock remains highly popular with our clients, and in trying to ascertain whether it really is a good investment, we need to weigh it up against its major sector peers.
Since last Autumn we’ve seen the discounters continue to creep forwards and gain market share. With consumer confidence looking to be improving somewhat, something we’ve observed in a return to riskier stocks like miners, what then for another heavily traded sector in the UK supermarkets? In this report we look again at the UK’s big three – Tesco, J Sainsbury and WM Morrison – and offer you our thoughts on each in terms of both capital gains and income potential.
The beauty of the UK supermarket sector is that there’s something for everyone. J Sainsbury is actually the pick of the big three on a simple fundamental level. Its shares trade at a decent discount to the both the average 12-month forward P/E and EV/EBITDA while its peers are trading at a premium to both – Tesco most notably. Nonetheless, Sainsbury’s shares have been stuck in a sideways range for the past 16 months – green pastures for range traders – and look set to continue to languish there for the foreseeable future, so income seekers should see a fairly constant dividend yield as long as SBRY can maintain it.
We wanted to include OCADO in the above table, but its fundamentals aren’t that useful given the fact the younger company has only just become profitable. If we included OCADO with its shares trading at 98x 12-month forward earnings, Tesco, Sainsbury’s and Morrison’s would all look like great buys! In the spirit of balance, we excluded it. It’s also worth noting that OCADO is the second most shorted UK Index stock, although Morrison’s and Sainsbury’s occupy almost adjacent positions while Tesco stock has very little short interest (Source: Shorttracker).
Short interest is in itself interesting since it’s quite often the case that short covering to take profits can intensify a breakout above resistance (if that coincides with a psychological support or resistance level). In this sense the potential for short, sharp price moves is greater for J Sainsbury and WM Morrison, if that’s what you’re after.
Tesco stock has arguably had the best short term trading potential of the three in 2016. There’s not much to go on fundamentally, but shares are heavily traded and Tesco’s presence in the news has attracted many a speculative play.
With Tesco stock currently trading around 158p (on 9 May), it’s been as high as 252p (+60% from current price) and as low as 137p (-13% from current price) so far this year. That’s a great range for those that seek shorter term opportunities to go both long and short. As things stand now, a recent break down below support at 163p could well see shares revisit 140p or even the floor of their 2-year falling channel at 130p (-18%).
WM Morrison (MRW)
WM Morrison stock has been the buy & hold star this year with its 30% recovery year-to-date seeing it re-admitted to the UK 100 blue chip index. Recent weakness seeing the price back to 182.5p could represent a buy on the dip opportunity for the shorter term trader too. Those investors interested in fundamentals will also note the company trading at a small premium to the averages discussed above, a small price to pay perhaps for the highest dividend yield of the three supermarkets in this report.
The above chart illustrates J Sainsbury’s current predicament – a range trader’s dream and a good dividend yield at the current price, with this looking set to get even better if the share price falls back towards the channel floor. With currently high levels of short interest in SBRY, might 300p (a convenient round number that will be recognised by many a technical trader) be the level that triggers a spate of short covering, boosting the share price further towards 2014 highs of 400p?
Deciding which UK supermarket is the best investment right now depends on what type of investor you are. Those that call themselves ‘traders’ will likely remain true to Tesco stock – there’s little except short term capital gains to be sought there at the moment. This may also be the case for Sainsbury’s with Range traders accompanied by those interested in value. Long term income seekers might go for Morrison’s with its superior dividend yield and solid 2016 share performance (as at 9 May).
What we’ve discussed here is just an example of the sort of no-nonsense, digestible research and insight our clients receive on a daily basis. With the UK supermarket sector subject almost daily to market-moving news and events, we pride ourselves on being your eyes and ears in the markets so you never miss an opportunity. Why not trial our research for two weeks and get daily market commentary (before the markets open), a multitude of technical observations and regular trade ideas delivered direct to your inbox?
We look forward to seeing you here again soon!
Augustin, Research Analyst (10 May)
This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.
Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance. Prepared by Michael van Dulken, Head of Research
Comments are closed.