Shares of FTSE 100 retailer J Sainsbury (LSE:SBRY) fell 5% in a day on Wednesday (3 December). That’s unusual, but what’s even more eye-catching is the reason why.
This kind of decline might usually be associated with a profit warning or a weak trading update. But in this case, there’s no real sign the business is underperforming at all.
The big news is that the company’s largest shareholder – the Qatar Investment Authority (QIA) – announced plans to cut its stake from 10.5% to 6.8%. That sent the share price lower.
Share prices – like other prices – are a function of supply and demand. So something that makes roughly 98m shares suddenly become available alters the balance in a significant way.
It doesn’t, however, change anything much about the underlying business. And QIA didn’t say anything that should cause investors to think the company is set to disappoint.
In fact, the recent evidence points the other way. Sainsbury recently upgraded its profit forecasts after its latest results came in ahead of expectations.
The stock market isn’t always 100% efficient. But it’s rare that a stock falls by a significant amount for reasons that have nothing at all to do with the business or its future prospects.
Substantial changes in share prices usually are usually brought on by something changing with the company. The market might overreact, but it’s rare that there’s nothing at all.
This, however, seems to be what’s happened with Sainsbury’s. Unless QIA knows something rest of us don’t – which is possible – investors don’t have anything new to worry about.
Given this, the question arises as to whether this could be the kind of buying opportunity that’s just too good to miss. And I definitely think it’s worth a closer look.
I can see why investors might want to be consider buying the stock at today’s prices. But I think they need to be careful to make sure they’re doing it for the right reasons.
The share price might have fallen sharply due to a one-off event. But buying on the basis that this means it’s going to reverse any time soon is a risky business.
This week has reminded investors that share prices can fall for reasons that aren’t to do with the underlying business. And there’s no rule saying they can’t stay there.
From a long-term perspective, though, I can see why investors might be interested. The share price is lower than it was a week ago and the company is showing some encouraging signs.
I think it’s worth keeping the drop in the Sainsbury share price in context. After falling 5% in a day, it’s trading at a level that hasn’t been seen since… September.