In order to help you navigate your way through the stock market for the remainder of September, we have identified and analyzed several shares you may wish to consider trading or adding to your portfolio. In particular, this week, we will be looking at Diageo, Alibaba and Sainsburys. 

Diageo – A Long-Term Investment Opportunity  (DGEAF)

The “September Effect” aside, it is hard to deny that we are currently living in uncertain times. Despite the success of the vaccination programmes in many developed countries and the subsequent relaxation of many social restrictions – the rapid spread of the delta variant and rising inflation are still cause for concern. 

When it comes to picking stocks in uncertain times, one of the most sensible and effective strategies is to identify a company whose products have inelastic demand. In other words, products that people will continue to buy regardless of what is happening in the economy.  

Alcohol is one such product and UK-based company Diageo, one of the largest producers and distributors of alcohol in the world, is one such stock to watch.  

You may not have heard of the company Diageo, but you will have certainly heard of their brands which include Johnnie Walker and Smirnoff Vodka – two of the world’s four largest international spirits brands by retail sales volume. Other notable products include Guinness, Gordons Gin, Baileys, Captain Morgan, we could go on but you probably get the idea. 

At the end of July, Diageo released their Annual Report for the year ended 30 June 2021 which were impressive, following disappointing results in 2020. Net sales increased 8.3% to over £12.7 billion, whilst operating profits also leapt up 74.6% to £3.7 billion. 

(Click on image to enlarge)

Depicted: Admirals MetaTrader 5 – Diageo Weekly Chart. Date Range: 25 April 2010 – 22 September 2021. Date Captured: 22 September 2021. Past performance is not a reliable indicator of future results.

Proven Track Record 

Diageo’s positive annual results have been reflected in their share price this year, which rose more than 20% during the first eight months. This impressive growth is not limited to just this year, as their annual report also tells us, over the past ten years, their stock has provided an annualized total shareholder return of 13%.  

Income investors will also be pleased to know that Diageo pays a reliable dividend, the size of which has grown every year since the company’s formation in 1997. This impeccable track record is all the more impressive considering that this timeframe includes the financial crisis of 2008 and, more recently, the coronavirus pandemic, both of which caused many companies to freeze dividend payments.  

This year’s total dividend of 72.55p per share represents a yield of around 2% at the current share price.  

An Opportunity to Buy? 

One of the downsides to investing in Diageo is its share price, which after an impressive year is not cheap, trading at about 30 times higher than earnings. However, the share price has recently retreated below its 50-day moving average. A further dip in share price could present an opportunity for prospective long-term investors. 

(Click on image to enlarge)

Depicted: Admirals MetaTrader 5 – Diageo Daily Chart. Date Range: 21 July 2020 – 22 September 2021. Date Captured: 22 September 2021. Past performance is not a reliable indicator of future results.

Given the range and quality of Diageo’s products, its continued investment and growth, its proven history of providing shareholder value and great track record of dividend payments – Diageo is a company with real long-term investment potential which investors may wish to consider adding to their portfolio. 

Alibaba – Time to Go Short? (BABA)

The Chinese e-commerce giant Alibaba presents an interesting, unique and potentially profitable opportunity. 

After soaring to all-time highs in October 2020, Alibaba’s share price reversed and plummeted, falling almost 47% by the end of August 2021. But this fall in share price is not attributable to the company’s performance, which happens to be fantastic. No, the drop in share price is mostly due to investor fear of regulatory risk in China.  

(Click on image to enlarge)

Depicted: Admirals MetaTrader 5 – Alibaba Weekly Chart. Date Range: 28 February 2016 – 22 September 2021. Date Captured: 22 September 2021. Past performance is not a reliable indicator of future results.

Strong Fundamentals 

In 2020, China made up more than 50% of worldwide online retail sales, they have the largest number of online shoppers in the world and their e-commerce market continues to grow. Alibaba holds a dominant position in this market and by the end of June 2021 boasted 828 million annual active consumers in China a number that has been growing steadily for several years. Worldwide, their active customers reach 1.18 billion.  

Besides from being one of the world’s largest retailers and e-commerce companies, Alibaba also offers cloud computing services and holds a 33% stake in Ant Group, which operates Alipay – a widely used Chinese payment processing company – and two lending businesses, Huabei and Jiebei. 

In August, Alibaba released their Q1 results (ending June 2021), which were impressive. Revenue increased across the board, with total revenue growing 34% year on year, reaching around $31.8 billion. Net income, although down 8% YOY was still an impressive $6.6 billion for the quarter. 

And yet, despite these encouraging statistics and fundamentals, Alibaba’s share price continues to fall as investors remain wary; and for good reason. Over the last year, Alibaba has been the recipient of a couple of high profile blows from Chinese regulators.  

Beijing Turns up the Heat on China’s Big Tech 

Towards the end of 2020, the highly anticipated Ant Group IPO was blocked in a move that appeared to be related to public comments Alibaba founder Jack Ma had made regarding the Chinese financial system. Furthermore, in April this year, Alibaba was hit with a $2.8 billion fine for anti-competitive practices.  

Just when sentiment appeared to be improving towards the stock, news emerged on 13 September that Beijing was moving to break up Alipay and force its separation from the Ant Group’s lending operations. This news led to Alibaba’s share price falling more than 6% over the following three sessions as Beijing’s latest move against Chinese big tech spooks investors. 

In the current circumstances, traders may wish to enter a short position against Alibaba, as the Chinese government’s tough stance towards technology companies is expected to harden. However, traders must remain attentive to any new developments. Given the excellent financial state of the company, should sentiment towards Alibaba change, this share price could be poised to shoot upwards. Expect volatility! 

Sainsbury Shares Set to Soar? (JSAIY)

A lot of news has been focused recently on UK supermarket Morrisons and its potential take-over by various private equity firms. However, at the end of August, Sainsbury’s share price shot up almost 10% in one session due to speculation that Sainsburys could be the recipient of its own takeover bid from US private equity firm Apollo Global Management. 

Neither Sainsburys nor Apollo commented on the matter and the share price retreated over the following sessions. However, rumours remain that, in a year that has already seen Asda acquired by EG Group and Morrisons wooed by several potential suitors, Sainsburys could be the next UK supermarket to get snapped up. If this conjecture becomes a reality, the Sainsbury share price could be set for an upwards surge. 

Why Is Sainsbury an Attractive Prospect for Acquisition? 

The race to acquire Morrisons is between Clayton, Dubilier & Rice (CD&R) and Fortress – with CD&R currently leading the way with a £7 billion bid, which was accepted by Morrisons in June. Whoever ends up missing out on the Morrisons bidding war may decide to turn their sights on Sainsbury. But what makes Sainsbury an attractive proposition? 

Sainsbury’s investors have enjoyed a good time lately, with share price increasing more than 65% in the 12-month period ending 31 August 2021. This increase in share price is not just down to takeover speculation, Sainsburys has performed well over the last year. 

(Click on image to enlarge)

Depicted: Admirals MetaTrader 5 –J Sainsbury PLC Weekly Chart. Date Range: 3 January 2016 – 22 September 2021. Date Captured: 22 September 2021. Past performance is not a reliable indicator of future results.

In their Annual Report for the year ended 6 March 2021, Sainsbury announced grocery sales were up 7.8%, general merchandise sales were up 8.3% and digital sales grew an impressive 102%. This jump in online purchases has been spurred by the pandemic, but it demonstrates that Sainsburys are well-equipped to adapt to changing consumer behavior. 

Sainsburys holds around a 15% market share in the United Kingdom, 50% higher than Morrisons’ 10% and second only to Tesco, whose market share is 27%. 

Based on current share price, Sainsburys has a market capitalization of around £7.15 billion which, when added to their net debt of £6.47 billion, gives it an Enterprise Value (EV) of £13.62 billion. This is in comparison to Morrison’s EV which is around £10 billion.  

Sainsbury holds property assets valued at £10.1 billion, which is considerably higher than their market cap, meaning there is an argument to be made that the current Sainsbury share price is low. 

The numbers reflect that Sainsburys could be the subject of a takeover bid in the near future which is likely to largely depend on the outcome of the current bidding war over Morrisons. If any concrete evidence of takeover interest in Sainsburys becomes apparent then its share price is likely to continue its upwards trajectory.  

However, it is important to bear in mind that any talk of a potential acquisition is pure speculation at this stage and may not materialize.  

Possible takeover aside - with a current dividend yield of around 3.5%, Sainsburys could prove to be a decent long-term investment option.