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1 FTSE 100 stock I’d buy in April, and 1 I’d avoid

Image: AstraZeneca. Fair use.

What crisis?

We’ve been waiting for a return to sustained earnings growth at AstraZeneca (LSE: AZN) for several years, and it’s surely not far away now.

The slump caused by the loss of patents on some blockbuster drugs is bottoming out, but there’s another drop predicted for 2017 before the City folk are expecting the first decent rise.

Commenting on the 2016 full-year results, chief executive Pascal Soriot, who was hired in 2012 to stop the rot, said that “2017 has the potential to be a turning point for our company as we near the end of our patent-expiry period and bring new medicines to patients across the globe“.

I’ll be looking out for Q1 results, due on 27 April, but should we be thinking of buying before we’re sure the pharmaceuticals giant is back on track? To help answer that, let’s see how badly AstraZeneca shares have done during the lean years… sorry, did I say badly?

Actually, if you bought shares five years ago, just as the earnings slump was really starting to bite, you’d be sitting on a 75% gain today with the price at 4,928p — while the FTSE 100 has put on a mere 25%. Oh, and AstraZeneca has kept its dividend payments going right through the downturn, and you’d have locked in an effective yield of around 7.5%.

In total, you’d have more than doubled your money if you’d ignored the naysayers and got in when things were looking tough — and you’d have done significantly better if you’d reinvested your dividend cash in new shares.

Would I buy AstraZeneca now it’s on a winning path again? You bet.

Oh, this crisis!

One FTSE 100 share I’m certainly not going to buy in April (or in any month for the foreseeable future) is Tesco (LSE: TSCO).

Tesco has full year results due on 12 April, and analysts are expecting earnings per share to more than double — but after a collapse of more than 90% over the previous four years, that’s still an awfully long way from the supermarket giant’s former glory.

Having said that, forecasts actually make Tesco look like a hot growth candidate with a current PEG rating of just 0.2. And further EPS growth forecast for the next two years would giving us attractive PEGs of 0.7 and 0.5 (lower is better). Those are ratings rarely seen in the FTSE 100, so why would I not buy Tesco?

Well, it is the biggest supermarket in the UK. And despite its tough period, I’m convinced Tesco will do fine over the coming decades, as new boss Dave Lewis’s strategy for realigning the firm with the realities of cut-throat 21st-century retailing bears fruit. But at what price?

If expectations do come good on the 12th, and if earnings growth does continue for the next two years as forecast, we’d still only see Tesco’s P/E drop to 15 (we’re looking at 25 right now), and I don’t see that as being justified at the moment. Sure, the dividend would be back to yielding around 3% by then, but that’s distinctly average.

We really don’t know what sustainable margins are going to be like in the long term, with the likes of Lidl and Aldi in the ascendant, and the fall in spending power caused by Brexit sending UK shoppers increasingly looking for bargains.

There are just better value shares out there than Tesco. Lots of them.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended AstraZeneca. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.