If you are interested in owning UK supermarkets, you actually have quite a lot of choice. It is a very competitive market, and supermarkets are one sector that should be doing well in the pandemic. This does not, however, seem to be the case with Sainsbury’s (LSE:SBRY).
Investors may be scratching their heads, but hedge funds smell blood in the water and there does seem to be a short term short trend shaping up. On the surface, Sainsbury’s this week said grocery sales were up by 7.8% while general merchandise sales were up 8.3%. But profit before tax was down 39% and one off costs have contributed to a loss of £261m.
How has Sainsbury’s made a mess of 2020’s supermarket opportunity?
The UK is opening up, which should be good news for the supermarket sector, but Sainsbury is muttering about “remedial costs” incurred because of surging demand. This goes back to the panic buying a year ago.
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But for us the big threat to Sainsbury is the competition. It seems as if supermarkets can go one of two ways in the UK at the moment: expensive, premium offerings like those provided by Waitrose (John Lewis Partnership) or the highly popular discount approach of new contenders in the space like Aldi and Lidl. The quality of the offering from these latter supermarkets continues to improve.
Sainsbury is getting squeezed here: it is in a bit of an identity crisis phase: go expensive, or cut prices and compete with the discount boys? There seems to be a lack of clear strategy and recent pronouncements seem to be tailored more to meet the demands of the market than being based on cogent reality.
The most shorted stock in London right now
And the reality is this. As of today Sainsbury is the most shorted stock in the London market. Hedge funds have been more careful about building massive short positions on struggling UK stocks since the GameStop riot – we have noted they have slashed their short positions on Pearson, which in January was a favoured short play. Funds are going to be careful about putting their head over the parapet at the moment, but in the case of Sainsbury they are.
Bigger hedge funds like BlackRock, Pelham and Marshall Wace all have big public short positions on Sainsbury. This is not GameStop either and any effort to boost the price short term by the usual suspects is going to be seen as a selling opportunity by bigger investors who can simply sell into the craze and buy back in later – as we saw with American Airlines and Nokia already this year.
Sainsbury shares have dropped from a recent peak of around 254 and at time of writing were trading at 237. There are two schools of thought here on the technical side. Two important psychological price levels on the downside have been isolated at 230 and 220. If there is a short term rally – and there may be – it is unlikely to get much beyond 245. We’ve seen a considerable amount of selling volume in the last 48 hours, which tells us net selling is breaking trend.
With the bad numbers out from Sainsbury’s this week, the likelihood is that those wanting a piece of the action here will sensibly stay out of the stock and wait for it to drop some more. Without significant buy side volume, we’d anticipate a short side trend over the next few weeks.