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I J Sainsbury (LSE:SBRY) share price fell 4.5% on Friday (11 October). But this is not because of anything wrong with the underlying business.
The reason is that his biggest investor made a significant sale at a discount to the stock's previous level. So could this be an opportunity for investors looking to buy the stock?
Discount sales
Sainsbury's largest shareholder is the Qatar Investment Authority (QIA). And the company decided to dispose of 109m shares in UK supermarkets at a price of £2.80 each.
That's about 4% of the company's outstanding shares. And the price represents a discount of about 3% from Thursday's closing price.
News that a major shareholder wants to sell doesn't usually fill investors with confidence in a company. As a result, stocks have been falling.
It doesn't seem to me that there's anything wrong with the basic business, though. So this could be the time for anyone who has been waiting for an opportunity to buy.
It's amazingly good
Sainsbury's operates in a very competitive industry – customers are very price driven and Aldi and Lidl are a big threat. Plus Tesco has the largest market share. And that won't change anytime soon.
Nevertheless, the business was doing well. In the first six months of the fiscal year, retail sales grew by nearly 8% and grocery sales increased by 10%.
This shows that Sainsbury's is well defending its position among budget retailers. And while earnings per share fell slightly, the company maintained its dividend.
Looking ahead, the company expects to generate at least £500m in free cash flow this year. Based on the current £6.5bn market cap, that means a return of 7.6% – that looks pretty good to me.
Why is QIA selling?
Given all this, the obvious question is why the sale of QIA shares took place. I don't know what the answer is, but a few things stand out to me.
Another is that the company still has a significant stake in Sainsbury's. It owned about 15% of the company as a whole before the sale, so shedding about 3% leaves it with a huge investment.
Another is that QIA's objective is to diversify the Qatari economy. As a result, selling may help reduce portfolio risk by investing elsewhere.
It doesn't seem to me that the sale – or the market's reaction to it – is anything to make investors rethink their view of Sainsbury's. But there is an important lesson here.
Investing in stocks
It is important for investors to have their own opinions about the stocks they choose to buy. And that means having a clear idea of why they are optimistic about the underlying business.
Whether it's Warren Buffett or the QIA, copying someone else is a bad idea. They may sell at any time for reasons that are entirely their own – and they have every reason to do so.
Sainsbury's doesn't strike me as a business I want to own. But if I were a positive person in the company, I would see the decline in the share price as an opportunity and I would consider it.
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