The J Sainsbury share price falls despite rising sales. Should I buy now?

The J Sainsbury (LSE: SBRY) share price is firmly in negative territory today. That’s despite the FTSE 100 constituent reporting that it had gained market share over the last six months and was in a solid position as the festive season approaches.

With the stock having come back down to earth following a flurry of takeover talk, is now a perfect time for me to buy?

Higher sales

Grocery sales rose 0.8% in the 28 weeks to 18 September compared to the same period last year. Perhaps more tellingly, sales were 9.1% higher relative to two years ago when few of us had ever uttered the word ‘coronavirus’. 

Sainsbury also said that it had made ground on competitors as a result of offering better value, new products and improved customer service. It had also seen “significantly lower” costs over the period. 

It wasn’t all rosy. Sales of General Merchandise fell by 5.8% compared to last year. That’s not necessarily surprising given the huge boost the company experienced as a result of multiple UK lockdowns in 2020. Again, the comparison with sales two years ago is probably a better gauge of performance. On this measure, sales were up 1.1%.  

So, why is the Sainsbury share price down? 

Looking ahead, CEO Simon Roberts warned that supermarkets face “labour and supply chain challenges“. Notwithstanding this, he went on to say that the company’s scale, operations and relationships with suppliers should allow it deliver “the best possible Christmas” for its shoppers. The market, it would seem, is less optimistic.

Investors may also have been spooked on expectations that customer behaviour will continue to “normalise” and growth in grocery sales “moderate“. This is hardly revelatory. Nonetheless, it arguably implies that SBRY is not the investment opportunity it once was. 

Despite this, no changes were made to guidance. Having hit £371m over the first six months, underlying pre-tax profit is still expected to be at least £660m for the full year. 

Takeover talk

Sainsbury stock was priced at 13 times earnings before the market opened. Valuation-wise, this puts it on par with rival Tesco. In terms of recent share price performance, however, there’s no contest. The Sainsbury share price is up almost 34% over the last year. Tesco has gained just 2%. 

Does this make SBRY a screaming buy? I’m not so sure. Sainsbury’s superior gains can probably be attributed to rumours that it’s now a bid target following the acquisition of Morrisons by private equity. 

Clearly, the share price could soar again if these rumours resurface. That said, I would never buy a stock solely on this possibility. As a long-term Fool, it’s the underlying business that matters to me. And with suggestions that Christmas sales at (Sainsbury-owned) Argos are likely to be held back by limited product availability, I can’t see the next few months being easy.

It seems I’m not alone. The stock continues to attract significant interest from shorters.

Better buy

I’ve long considered Sainsbury to be a value trap. Recent performance flies in the face of this. In an industry where clout matters, however, I still think the best option is Tesco. It has almost double SBRY’s market share, offers a similar dividend yield, has lower debt relative to its size and slightly better margins.

This all gives it an edge when it comes to selecting FTSE 100 stocks for my own portfolio.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.