Tesco PLC Is Our Best Supermarket Pick

Despite its problems, Tesco PLC (LON: TSCO) still leads the sector.

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Let me tell you what I don’t like about Tesco (LSE: TSCO).

I don’t like the way the UK’s biggest groceries retailer dropped the ball back in 2011, and didn’t notice that anything was going wrong until that year’s Christmas trading period went bad. Tesco had grown complacent, and was sitting on its reputation while the others were snapping at its heels with better brand management, better promotional activity, and a keener sense of having to work hard to retain customers.

TescoWhen I added Tesco to the Fool’s Beginners’ Portfolio in May 2012, I was thinking “Hey, this is a responsive company, and things will be sorted by next Christmas“. But things weren’t, and I didn’t like that.

And now we’re well into 2014, things still aren’t sorted. In fact, City analysts aren’t expecting to see any earnings growth at Tesco until 2016. And I don’t like that either.

But it’s still the best

So why do I rate Tesco as the best in the sector? It’s because it doesn’t really have any competition. I know, in such a competitive business that might sound like a stupid thing to say, but please hear me out…

What I’m talking about is competitors for the UK retail crown. Asda is out, from an investment view — sure, you can buy WalMart shares if you want, but I’m strictly a FTSE 100 man when it comes to my sector reviews. With around a third of the UK’s groceries sales sewn up, Tesco has it.

J Sainsbury is a company I rate highly — in fact, I got a bit of haddock there at the weekend that was good enough for Jehovah himself (they were out of halibut). But Sainsbury is just too up-market to match the appeal of Tesco — I want to own a supermarket that’s selling millions and millions of fish fingers, not select portions of finest fillet.

Web winner

I’m looking at the online-shopping competition too, and come on, there’s nobody close! Tesco pioneered it, the others followed and are struggling to keep up — and Wm Morrison has only just managed to get off the ground with its offering! Morrison never manages to come up with any ideas of its own. Online shopping, smaller convenience stores, whatever — it follows the others, usually some way behind, and it’s just a non-runner in the Best supermarket investment stakes.

Branching out into other areas, like clothing, banking, electricals, telecoms… it’s usually Tesco there first.

How about international expansion? Well, you know my answer — USA, Thailand, Malaysia, South Korea, China, Ireland…

Cheap shares

stock exchangeOn fundamentals, Tesco shares are looking cheap now, despite having fallen 25% to 285p over the past 12 months. Although we still have a couple of years of earnings falls forecast, the shares are on a forward P/E of under 10. And there’s still a great dividend on offer — we’re likely to be getting a twice-covered yield of around 5% per year for the next few years, and that’s historically very high for the supermarket sector.

But while getting the valuation timing right is nice, my overwhelming reason for choosing Tesco is that… there’s just nobody else.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan does not own any shares mentioned in this article.

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