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Trader Talk is produced by a team of active traders, analysts and various derivatives professionals from multiple organisations. Trader Talk provides comment on equities, commodities, and other financial instruments based on both technical and fundamental analysis.
Invest for less at Sainsbury
It has been a mixed week for equities as investors digest strong moves made over the festive period and weigh-up the risks of key future events.
Highly anticipated sovereign bond auctions in Spain and Italy were well received, providing short-term relief to the market. The yield on 10-year Spanish bonds fell 7.7 basis points to 5.28% and raised double the targeted amount, in this year’s first real test of appetite for debt from the Eurozone’s periphery. Italian yields were also 24 basis points lower at 6.79%, as Premier Mario Monti gained recognition for his austerity efforts.
Ratings agency Fitch offered further good news to the Eurozone after announcing France’s top triple-A credit rating was safe for 2012, barring any significant economic shocks. Speculation has been rife for months that France, the second largest economy in the Eurozone, could lose its prized rating. Italy remains on watch for a possible downgrade.
Weak German industrial production data, however, provided a reminder of the headwinds facing the Eurozone. Production fell 0.6% in November, below expectations, adding to fears that slower global growth will dampen demand for its exports.
Chinese trade data revealed imports slowed in December, adding to the picture of deteriorating growth in domestic demand, although hopes that weak growth will prompt more economic stimulus in China, sent Asian markets higher.
Fourth-quarter US earnings season kicked-off this week with Alcoa, the US aluminium group, providing some reassurance to investors. Despite reporting its first quarterly loss in more than two years, a strong outlook for the metal lifted hopes for the heavy-weight mining sector. In general, the reporting season is unlikely to be particularly upbeat, as the growth rate of profits in 2012 is likely to be lower and many companies have already cut costs, leading to possible volatility ahead.
Technical analysis highlights the strong resistance being encountered by the FTSE 100 at 5700 and with the oscillators showing signs of rolling over in overbought territory, it looks as though a move lower is likely. Conversely, the moving averages are both rising and the flag formation formed through a series of higher lows, suggests a break-out is becoming increasingly likely. Support is seen at 5600, 5492 and 5390, with a close above 5700 viewed as a potential trigger for a move higher.
In conclusion, positive news surrounding the Eurozone debt crisis helped restore some confidence in risk assets, particaulay financials. The outlook, however, remains extremely uncertain ahead of fourth quarter earnings season in the US and further news from Europe. Given the close proximity of major resistance at 5700, a move lower is regarded as the most enticing trade on a risk/reward basis, but a break-out higher is becoming increasingly likely.
Following the release of post-Christmas trading statements, the supermarkets stole the headlines this week and after several years of investment, Tesco’s main competitors have significantly improved.
This can be seen from the Christmas trading statements; Tesco’s like-for-like sales (excluding fuel and VAT) fell 2.3% in the six weeks to 7th January 2012 in the UK, whereas Morrison’s grew by 0.7% and Sainsbury’s rose by 2.1%.
The market widely expected Tesco’s UK performance to be poor, but had not anticipated just how fundamental a change to strategy it would cause. According to ratings agency Fitch, changes in the UK market and the weak economic environment mean that Tesco’s dominant position is likely to slip further in the coming two years. The growth of its international business should however, offset some of the slowdown in its UK supermarkets over the next two years.
Sainsbury’s (LON:SBRY) sales figure of 2.1% was ahead of city expectations of a 1.8% rise, reiterating that full-year consensus remains in line with previous guidance. Despite comparatively strong results, the shares were impacted by negative sentiment towards the sector, falling over 7% during the week. They now yield a prospective 6% in 2013, higher than traditional defensive dividend plays such as GlaxoSmithKline on 4.9% and British American Tobacco on 4.6%. The business is extremely cash generative and with over 1.7 times earnings cover, the payment also appears secure.
Sainsbury is also cheaper than its peers on 10.5x earnings and the valuation is supported by £10.9 billion of property, compared with its £5.4 billion market capitalisation, something the Qatari’s have been particularly interested in. Qatar Investment Authority, the investment arm of the country’s fund, currently holds a 26% stake in the retailer and has often been rumoured to be interested in acquiring the whole company.
The above chart captures the recent falls, with the shares rapidly declining from the 200-day moving average at 310p to a recent low at 280p, before settling marginally higher. Although the oscillators have moved lower it is interesting to note the presence of divergence, implying little conviction behind the selling.
At the time of writing the share price is 285.9p and with a stop-loss below the recent low at 274.4p, the trade also offers an attractive risk/reward bias. Near-term targets are seen at 298.8p, 304.9p and 310p.
This report was written by Mark Allen – Head of Derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Sainsbury, but client accounts may. The material in this report has come from Simply Charts and Sainsbury’s corporate website.
