Should I Buy Sainsbury?

LONDON -- It's time to go shopping for shares again, but where to start? Banking bad boy Lloyds Banking Group? Household good guy Unilever? Or high-street favorite Marks & Spencer?

There are plenty of great stocks to choose from, and I'm enjoying doing some window shopping. So here's the question I'm asking right now. Should I buy J Sainsbury (ISE: SBRY.L) ?

Very tasty
Supermarket giant Sainsbury has enjoyed a delicious role reversal lately. After trailing the apparently unstoppable Tesco for years, it has fought back strongly to become the clear investor favorite.

The Tesco share price is down 25% this year, but Sainsbury has no such worries. It is up nearly 20%, and at 3.60 pounds is trading close to its 52-week high.

Sainsbury and Tesco? You really can taste the difference. So is now a good time to add it to my shopping basket?

King of the retail giants
Sainsbury defied the high-street slowdown to post more strong results in the third quarter, treating investors to an expectation-bashing 1.9% rise in profits.

Total sales, including from new shops, rose 4.3%. Chief executive Justin King pinned the success on the supermarket's successful own-label ranges, in particular Taste The Difference, which enjoyed double-digit growth. Brand Match was another success. He predicted the supermarket's current campaign, Live Well For Less, will be another winner.

To make success even sweeter, Tesco simultaneously posted its first drop in profits since 1994.

Olympic winner
The tills haven't all been ringing at Sainsbury this year. It disappointed the market in June, when like-for-like sales rose a weak 1.4%, although markets quickly recovered their appetite for the stock.

Sainsbury knows consumers are hurting right now, and that won't change for some time. It also accepts that the summer glow of the Jubilee, Olympics, and Paralympics (which it successfully sponsored) will have faded by now.

It will also be casting nervous glances at Tesco, knowing that its competitor will be desperate to recover lost ground.

Go on, have a bite
Christmas, of course, is a key battleground for supermarkets. Tesco swaggered into last year's festivities with its Big Price Drop campaign, only to retreat with a nasty hangover. It is impossible to pick a winner at this point, but given Sainsbury's recent strong form, you would be brave to bet against it.

I normally shy away from companies whose share price has rallied sharply, but Sainsbury still trades at a handsome yield of 4.5%, covered 1.7 times. Investors can expect future dividend hikes, from money released as Sainsbury cuts its capital investment program.

The stock isn't cheap, on a forecast price-to-earnings ratio of 12.7 times earnings for March 2013, and rising food prices could dent its margins. But if you're looking for a tasty blue chip to hold for the long term, you should cut yourself a slice of Sainsbury.

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Harvey Jones doesn't own any shares mentioned in this article. The Motley Fool owns shares in Tesco.The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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