Billionaire investor Warren Buffett once advised that “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. As a value investor, I adapted this quote to suit my own investing style. My version reads that “it’s perfectly okay to buy into a boring company at a good price”. But why buy into boring companies such as J Sainsbury (LSE: SBRY)? Because they can become exciting — and that’s certainly been the case for the Sainsbury’s share price recently.
The share price dives
As the UK’s second-largest supermarket chain, Sainsbury’s has a grocery market share of 15.2%. Its orange-branded stores are a familiar UK sight. Having traded since 1869, it has a long pedigree. The grocery chain was the UK’s largest from 1922 until 1995, when Tesco took first place. Also, its shares have been listed in London since 1973 and included in the FTSE 100 index since its creation in 1984. But the Sainsbury’s share price has endured a few tough years.
Three years ago, on 24 August 2018, the share price hit 336.4p, its high point of the past half-decade (until this week). Alas, after being crushed by Covid-19 restrictions, the shares slumped to an intra-day low of 172.32p on 1 September 2020. But they soon bounced back when effective Covid-19 vaccines were unveiled on ‘Vaccine Monday’ (9 November 2020). By 27 January 2021, the stock had recovered to close at 252.89p.
However, the Sainsbury’s share price then slipped back, falling to its 2021 closing low of 221.3p on 2 March. I kept an eye on this stock until the group released its full-year preliminary results on 28 April. At that time, I said I saw value in the Sainsbury’s share price. I was attracted to the decent dividend yield, which was then 4.5% a year. Also, I was encouraged by a forecast pre-tax profit of £620m for the 2021/22 financial year (versus £586m in pre-Covid 2019/20). Hence, I said: “I’d buy at the current level“ of 236.7p.
SBRY rebounds hard
A week ago, on Friday, 20 August, the share price closed at 294.7p. That was 58p — or almost a quarter (24.5%) — above the 236.7p I was attracted to on 28 April. However, news then emerged last Sunday of a possible takeover bid for the chain. Rumours swirled that US private equity giant Apollo Global would offer more than £7bn to buy Sainsbury’s equity. Hence, the shares soared, hitting an intra-day high of 342p on Tuesday (a seven-year peak). The stock has since fallen back, closing at 310.4p on Friday, 27 August, valuing the chain at £7.24bn.
So, the big question is: what next for the Sainsbury’s share price? Will a firm bid emerge and send the stock higher, or will it keep weakening? Obviously, I can’t say. I don’t own SBRY and wouldn’t buy at current levels. But if I did own SBRY, I would not be rushing to sell my stock. After all, Sainsbury’s is asset-rich: its property portfolio alone is worth £10.1bn. Also, it generates large, reliable cash flows, making it a target for a leveraged buyout. And it still offers a dividend of 3.4% a year. Furthermore, a bid at, say £8bn for the group’s equity would be worth 343p a share. After retail’s recent re-rating, SBRY shares seem fairly valued to me. But they could suffer if Covid-19 worsens. As I said, I won’t buy today, but I wouldn’t sell either.
The post I was right about the Sainsbury’s share price. It’s jumped over 30%! appeared first on The Motley Fool UK.
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Cliffdarcy 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.