Many managers bullish on the sector own more than one of these three, according to Morningstar Direct data. Meanwhile, Ocado’s recent stellar performance – it was the best performing stock on the FTSE 100 in 2019 with a gain of 57% – suggests there are still growth opportunities in the online grocery market. Tech giant Amazon also sees promise in the UK grocery market – it has teamed up with Morrisons as well as offering its own rival service, Amazon Fresh, in certain cities. And Marks & Spencer also hopes to benefit from Ocado’s technology after it struck a deal with the online grocer last year .
So, rather than being a staid sector, there’s plenty of disruption to come. Tesco Turnaround Tesco was the standout performer among UK supermarkets at Christmas, continuing its turnaround after a difficult five years, which included an accounting scandal and profit warnings. Of the three main listed supermarkets, Sainbury’s is the only one to have a four-star rating, which means Morningstar analysts think its shares are undervalued because of its focus on quality, strong online presence and convenience store network. Invesco UK Growth is one of the highest rated funds that owns Sainsbury’s, with a Morningstar Analyst Rating of Silver and a 3.44% weighting to the supermarket chain.
Investec’s Alistair Mundy owns both Tesco and Sainsbury’s in Investec Special Situations and Investec Total Return funds. Sainsbury’s also makes up a large part of the portfolios of two-star rated TM Crux UK Opportunities and three-star rated Invesco UK Focus Fund . After the Christmas trading update showed a near 2% fall in sales year on year, Morningstar retail analyst Ioannis Pontikis lowered his “fair value” estimate Morrisons shares to 203p, down from 208p. The stock has a three-star rating, which means that it is fairly valued.
Despite the ultra-competitive retail environment, Morrisons looks committed to expanding via a number of new partnerships. While the almost-3% dividend yield on the stock makes it an attractive target for income funds, Morrisons is also popular with value managers expecting a turnaround after a year or so of underwheling share price performance. Silver-rated Schroder Recovery , for example, has more than 4% of its portfolio in the stock, while Bronze-rated Schroder Global Recovery has a 2.5% weighting. It’s clear that what’s good for shoppers – lower prices, greater competition, increasing ways to buy groceries – is not good for profit margins.
But investors are not expecting grocery stocks to shoot out the lights and prize them for being reliable income payers with defensive qualities. Ocado offers a riskier but potentially more rewarding pitch as a growth stock. Despite the weak sales environment, there are reasons to be optimistic about the sector, particularly with technological changes offering opportunities to the existing players. The UK was an early adopter of online grocery shopping, particularly in comparison with Europe, but the online retail only makes up around 10% of the overall market.
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