In 1869, John James Sainsbury founded a shop in Drury Lane, London, from which grew the supermarket chain we know today, J Sainsbury (SBRY). For a long time it was the unchallenged top dog in the grocery industry, enjoying a period of dominance from 1922 until Tesco knocked it off its perch in 1995. Venerable Sainsbury has never been quite the same since.
Life is tougher across the industry, though. Supermarkets no longer enjoy fat profits from the cookie-cutter hyperstore approach that characterised their growth over the boom years. Any industry that boasts high profitably can expect competitors to gaze at its honey with envious eyes. And so, in 1990, Aldi landed on UK shores and began to slowly but surely cut swathes into the Big Four’s dominance. Progress was slow at first, as the company consolidated its foothold and grew its store base quietly. But the 2008 financial crisis saw purse strings tightening and people deserting their favourite supermarkets in droves – right into the welcoming arms of discounters. Couple that with the cost drain of online grocery shopping and supermarkets are far from the formidable businesses they once were, something reflected in their stuttering share price performances in recent years.
Perhaps it could’ve been expected that supermarkets wouldn't outperform other sectors in the Covid-19 crash for long. Panic buying of toilet rolls and hand sanitiser may have brought a short-term boost – but anyone foolish enough to buy 40 toilet rolls at a time now won’t be buying any for a long time and will have nowhere to put anything else they may buy. True, with restaurants shut, people are more reliant on the supermarket than they have been in a long time. But this influx of new custom has come at a cost. Plexiglass windows need to be fitted, extra staff need to be hired and trained, cleaning schedules have been bolstered, and payments are being made to those who need to self-isolate for safety. Any short-term boost has been hugely offset by the cost of coping with Covid-19.
This could be why US hedge fund Citadel has fired a salvo at both Sainsbury and WM Morrison Supermarkets (MRW); Citadel has built one of the largest short positions on record in the UK with 3.92 per cent of the latter’s stock. Morrisons issued a first-quarter sales update this week which showed like-for-like sales up 5.7 per cent (excluding fuel); however, no clarity was given on costs, with the business only able to say that the net effect of costs is highly dependent on the length of the crisis and how customers respond.
If Morrisons does do better than expected and we see a run-up on the stock, then Citadel may come under pressure and feel a squeeze – traders should be watching. As well as Morrisons, Citadel is also betting on a fall at Sainsbury with a short position of 1.93 per cent of Sainsbury stock. From a short-selling perspective, it certainly makes sense to target the weaker companies in the sector. Research group Kantar measures Tesco (TSCO) as having 26.8 per cent market share as of 19 April 2020, with Sainsbury trailing at 15.3 per cent and Morrisons at a lowly 9.9 per cent.
Looking at Chart 1, we can see how the stock traded in the run-up to and through the 2008 financial crisis. The 200 EMA (exponential moving average) proved a solid measure of support as pointed out, offering traders a clear signal where significant price action zones were for the stock. In November 2007, Sainsbury gapped down through the 200 EMA and carried on falling – tagging the 200 EMA several times before putting in a low of 237p in October 2008.
It goes to show the dangers of a falling knife. Sainsbury dropped from 540p to 460p in the gap, and no doubt many investors added to their position when the price was falling. For a trader, when a stock gaps down and volume is through the roof with the price falling, this is when they should be taking advantage of the panic and disarray by opening a short position on the stock. When institutions are sellers, the price is only going to go one way until value begins to appear and other institutions begin to take up the supplied stock. By following the trend, a trader can rack up a handsome P&L when both volatility and volume increase significantly. In recent months, Sainsbury stock appears to be struggling. Looking at Chart 2, we can see that the price has put in a double bottom, marking the 171-177p zone as support. The stock struggled to rally, passing briefly through the 200 EMA, but coming back to trade underneath it, and test this level again as support.
Like Citadel, I believe the stock looks an attractive short from a trading perspective. The longer-term trend is down, and it is trading below all of the moving averages. Should the stock take out this double bottom it would be trading at all-time lows; a traditionally bearish viewpoint as the entire shareholder register is now underwater on their stock.
Sainsbury’s final results (like Morrisons') also highlighted the unpredictably of the future. Given that humans and management are inherently optimistic, it would not surprise me to see Citadel proved right here. My view: short Sainsbury if it takes out the all-time low at 171p.
Updates
- We looked at Ocado (LSE:OCDO) last month (‘Ocado’s trolley dash’, 8 April 2020), and I suggested that a break of the 1,650p all-time high could see upside in the stock. As the stock is currently trading at 1,960p after surging on a recent trading update, I believe it will see resistance at 2,000p due to it being a ‘big round number’ and a psychological barrier to crack. Long holders should be wary.
- As a follow-up on last week’s article – it has been suggested that easyJet (LSE:EZJ) may need to raise up to £1bn in a rights issue. The stock is trading near the short level highlighted and I am watching to take a position.
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