Following heavy falls, the supermarket's shares are priced in bargain territory.
Each day this week we're highlighting a share you may wish to consider for your ISA. Today we turn our attention to Tesco, which saw its shares fall heavily in January following a disappointing trading update.
As Britain's largest retailer, Tesco (LSE: TSCO) needs little introduction. And with its valuation priced firmly into 'bargain' territory, ISA investors have every incentive to pop a few shares into their shopping trolley.
So how come Tesco -- which has a bigger share of the British grocery market than that of J Sainsbury (LSE: SBRY) and Asda put together -- is so cheap?
Look closely, and there are various factors at work.
Not your average grocer
First, the City finds it difficult to weigh up the firm, thinking of it as a British supermarket, when fully half of its sales are overseas, and spread over 13 countries -- not to mention extensive interests in catalogue shopping, banking and insurance, telephone services, travel, and home furnishings.
New chief executive Philip Clarke, too, has yet to prove himself in the market's eyes, after taking over from long-time chief executive Sir Terry Leahy last year.
Then there's the firm's high-profile 'Fresh & Easy' American operation, which has lost £700m and absorbed £1bn of capital since 2007, and is only just expected to break even this year.
FTSE up, Tesco down
Roll it all together, and it only takes the core British supermarket business to slip a gear for the shares to take a hammering -- which is exactly what happened in mid-January, when Tesco's share price collapsed 20%, falling from 390p to 315p in a matter of days.
Put another way, this means that Tesco has under-performed Britain's flagship FTSE 100 index of leading shares by a whopping 60% over the past three years.
Which for the world's third-largest international retailer, and a business with an unbroken 25-year history of solid growth and rising dividends, is remarkable.
Window of opportunity
But it's also a buying opportunity, and a chance to tuck away a few shares that have every chance of returning to Tesco's former sparkling form.
Company management certainly think so: chairman Sir Richard Broadbent has loaded his trolley with nearly £100,000 worth, with several other directors making chunky purchases during January and February.
And at a recent price of 312p, you're picking up Tesco shares on a P/E of just 9, meaning that you're buying each £1 of Tesco's future profits -- profits that are effectively yours for as long as you hold the shares -- for just £9.
What's more, while you wait for the share price to recover from its recent battering, there's a decent dividend yield of 4.9% to bank. That's much higher than the market average right now, and quite possibly Tesco's highest-ever yield for at least 15 years.
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