Life is swings and roundabouts, and so is investing. What goes up all too often comes down, and if you are lucky, it works the other way round as well.
Supermarket giant Tesco (LSE: TSCO) and microchip manufacturer ARM Holdings (LSE: ARM) are two companies that have been surging in different directions for some time. Over the last five years, Tesco is down a hellish 55%. Over the same period, ARM is up a heavenly 215%. To the novice investor ARM would clearly look the better prospect, it is hard to argue against momentum. But life is full of surprises, and maybe today’s down-and-outer could be tomorrow’s up-and-comer (and vice versa).
Korean Opportunities
Tesco keeps falling, down 20% in the last six months, after hopes that new boss Dave Lewis would chart a course towards smoother waters ran aground. Drastic Dave has a far bigger job on his hands than he can have guessed when he signed up to salvage what is still the UK’s number-one grocer. He has finally offloaded South Korean unit Homeplus, which was sold for £4.2bn, but that cash injection counts for little when market share keeps on plummeting.
It is hard to put too much faith in Tesco’s turnaround prospects with latest Kantar figures showing sales down 1.1% in the 12 weeks to 11 October and share down to 28.1% from 28.8%. The fact that Tesco has been forced to slash prices like everybody else only makes matters worse. Near-zero inflation and rising wages should be putting more money into shoppers’s pockets but grocery deflation has wiped out the benefit. Tesco’s forecast operating margins are now just 1.1%. Under former boss Philip Clarke it was targeting 5.2%.
Fresh Mess
If the onslaught from Aldi and Lidl wasn’t bad enough, next year Tesco must contend with the full-launch of Amazon Fresh, which Kantar claims could “be a major disruptor, bringing down average basket sizes, accommodating on demand shopping, and accelerating the growth of the whole online market”. At 19.42 times earnings Tesco isn’t even cheap and there is no dividend either. Two years ago I swept all the supermarkets at my portfolio and I see little reason to return to Tesco now.
Strong ARM Tactics
I was wise to sell Tesco then but daft to sell ARM Holdings just before it became what would have been my first four-bagger. Despite posting encouraging fourth-quarter results in February the stock was caught up in the wider US tech market sell-off in March, one of those irrational bouts of selling that cool-headed long-term investors should welcome like desert rain. It hit a nadir of 825p on Black Monday in August but has since confirmed its class, rebounding 28% to today’s 1057p.
ARM’s Q3 results showed a pretty fab 37% year-on-year increase in processor royalty revenues, and 17% rise in overall revenues to $375.5m. Semiconductors is a competitive market but ARM not only has an edge, but seems to be sharpening it by the day. It recently claimed that its revenues will outpace the market by 15% in the medium term and the faster it grows, the more it can invest in R&D, and the harder it will be for competitors to catch up.
ARM still looks young and hungry, Tesco looks tired and bloated. That has been the story of recent years, and I can’t see any reason for it to change now.
