The grocery sector has been under immense pressure in the past few years as the arrival of German discounters Aldi and Lidl has forced widespread price deflation across the industry. Accounting scandals and mismanagement have also caused a number of stocks to suffer significant de-ratings. But looking at the sector for 2016, we think there's one company that hasn't been given enough credit for navigating these challenges. J Sainsbury (SBRY) actually impressed the City with its latest results, particularly given signs that like-for-like sales declines may finally be slowing (see chart below). Dividends remain in line with the company's payout policy and a joint venture with Danish retail group Dansk Supermarked could help it compete with the likes of Aldi and Lidl at the cheapest end of the market. What's more, the stock's discount valuation makes it look compellingly cheap for new investors, and our Contrarian Tip of the Year.
- Like-for-like sales decline slowing
- High prospective dividend yield
- Netto joint venture
- Discount valuation
- Deflationary pressure
- Pension deficit
Often the best time to come to a contrarian investment is when trading starts to stabilise rather than when a recovery is in full swing. We think Sainsbury's may be at that point. Not only did recent expectation-topping half-year results (underlying pre-tax profit was still down 18 per cent at £308m) point to an improving quarter-on-quarter like-for-like sales trend, but there are signs that the group's third-quarter trading statement, due out on 13 January, could provide a further fillip.