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Questor: Sainsbury’s has potential, but the shares have got ahead of themselves – it’s only a hold

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A shopper stands with her purchases in an orange plastic Sainsbury's supermarket store shopping bag
A shopper stands with her purchases in an orange plastic Sainsbury's supermarket store shopping bag

Sainsbury’s has been seen as a takeover target for as long as Questor can remember. However, bid talk has reached fever pitch in recent weeks. Investors appear to expect an approach from Apollo, the US private equity firm that lost the bidding war for Asda last year.

Even without the takeover speculation, Sainsbury’s shares were already making strong progress following our tip in March. However, the bid rumours have thrust them to levels where they lack a sufficiently wide margin of safety to merit new investment.

The retailer trades at 18 times forecast profits, which we see as close to full value even if earnings per share are expected to grow by 8pc in each of the next two years. We remain upbeat about the company’s long-term growth potential, however. Its refreshed strategy has yet to fully play out, while its latest trading update reported further progress in areas such as online, cost reduction and restructuring the supply chain.

Moreover, consumer confidence has returned to pre-pandemic levels. This may support margins among mid-tier retailers such as Sainsbury’s, while a strong outlook for the economy, which is expected to grow by 7pc this year, should improve the outlook for domestically focused businesses.

Questor says: hold

Ticker: SBRY

Share price at close: 310.4p

Update: Taylor Wimpey

The approaching end of the stamp duty holiday may prompt more house price volatility. House sales tumbled by 62pc in July following a dilution of the policy at the end of June.

Lower demand could realistically produce slower growth in prices than the 7.6pc seen over the past year. Despite this, we continue to rate house builder Taylor Wimpey a buy. It has outperformed the FTSE 100 since our tip in October 2018, rising by 13.1pc against 1.2pc for the index.

However, the long-term dynamics of the housing market appear intact. A fundamental undersupply of new homes, coupled with continued low interest rates and a rapidly growing economy, means that demand for Taylor Wimpey’s properties is likely to remain high. Government support such as the Help to Buy and mortgage guarantee schemes should further aid the house builder’s prospects.

The company is in a strong position to capitalise on this upbeat outlook. A £500m capital raising in the depths of the pandemic allowed it to engage in a land buying offensive that should offer long-term growth opportunities. Its £907m net cash position suggests it has the means to overcome any worsening of the pandemic.

Taylor Wimpey’s forecast price-to-earnings ratio of 11 suggests it still offers a favourable risk/reward opportunity given its long-term prospects.

Questor says: buy

Ticker: TW

Share price at close: 181.2p

Update: IAG and easyJet

While our Sainsbury’s and Taylor Wimpey tips have outperformed, our advice to buy airlines IAG and easyJet has fared less well. They have underperformed the index by 8.8 and 34.2 percentage points respectively since we tipped them in February 2021 and January 2020.

Continuing travel restrictions and the cost and inconvenience of Covid-19 tests for returning travellers mean that both airlines continue to carry very few passengers. This situation could persist over the coming months and may lead to further share price volatility.

However, both companies have the financial means to survive further disruption. Liquidity levels currently stand at £2.9bn for easyJet and £8.7bn for IAG. They have cut costs and raised capital during the pandemic. This should make them relatively well placed to capitalise on an eventual recovery in international travel.

The scale and timing of that recovery are impossible to predict. But with the record savings levels amassed during lockdown ready to be unleashed, a global vaccine programme that has inoculated 33pc of the world’s population with at least a first dose and a strong global economic recovery widely forecast in 2022, we retain our buy stance on easyJet and IAG thanks to their long-term recovery prospects.

Questor says: buy

Ticker: IAG, EZJ

Share prices at close: 163.52p, 809p

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.

Read Questor’s rules of investment before you follow our tips.

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