Put cheap Sainsbury in your trolley

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. 

Chief executive Mike Coupe has expressed hopes of a "winning Christmas" as customers push the boat out buying premium products to make the most of the festive period. Data from research body Neilson suggests Sainsbury's recorded 0.5 per cent sales growth in the 12 weeks to 5 December 2015. And the company's Christmas advertising campaign - this year featuring Mog the cat - was certainly a hit with the British viewing public and the media. Quite how the Christmas trading period has gone has yet to be seen, but City analysts are already coming around to the idea that Sainsbury's might be the most resilient of the UK's 'big four' supermarkets. Tesco (TSCO) is still the UK's largest grocer by market share, but Clive Black at Shore Capital is confident Sainsbury can comfortably hang on to second place.

What's more, Sainsbury's could compete at the lower end of the market too, rather than simply competing with its middle-market peers. The rollout of the low-price Netto stores - part of a joint venture with Danish retail group Dansk Supermarked - is due to ramp up this year. Nine more doors are due to open before the financial year-end, bringing the total number of Netto store launches for FY2016 to 15. An official update on initial trading at the Netto stores isn't due until the group releases full-year results in May, but Mike Coupe said the first signs were "encouraging".

Finally, while the National Living Wage is posing a threat to most retailers as they will be forced to increase pay for the majority, Sainsbury's seems to have pipped the government to the post in the near term, raising wages by 4 per cent to £7.36 an hour - ahead of the new £7.20 threshold, which will apply from next April.

One unexpected event ahead of the publication of this tip has been news of Sainsbury’s interest in buying Home Retail Group (HOME) – the owner of Argos and DIY chain Homebase, which itself was formerly owned by Sainsbury. While the share price reaction has been negative there may be some compelling logic behind the move given Sainsbury has been trialling Argos outlets inside its stores which has the potential to increase the productivity of its retail space. Home Retail would also come with about £300m cash and loans to customers buying on credit worth nearly £600m.