When all is said and done, investors in a company only ever have three options: buy, sell or hold. And, while making that decision may sound simple, doing so can be extremely challenging as the risks and potential rewards are weighed up in an investor’s mind.
For example, Tesco (LSE: TSCO) may appear to be a rather risky buy at the present time, with most investors seemingly being of the opinion that the country’s largest retail is a sell or, at the very least, a weak hold. That’s because it is enduring major internal and external problems in tandem which are causing its financial performance to come under severe pressure.
Regarding its internal problems, Tesco appears to have lost its direction since Sir Terry Leahy left the business as CEO in 2010. For example, it decided to diversify its operations and try its hand at a range of operations, such as film streaming and even selling used cars. This inevitably diverted focus away from its core operation of being a supermarket and, alongside the decision to exit the US market even after it had made a long term commitment to establishing itself there, caused the company to at least appear to lack direction.
In terms of external factors, the obvious one is the pressure which household budgets in the UK have been put under in recent years. Grocery shopping has gradually become all about price, discounts and bargains whereas when Tesco was in its pomp it was about value for money, trading up to its Finest range and the convenience of a large supermarket with free parking and decent customer service.
Both of these challenges, though, can be overcome. Tesco is becoming increasingly focused on its core operations and under its new management team is selling off surplus assets. In addition, UK wages are rising faster than inflation and, as history shows, once recessions are overcome people quickly return to old habits. As such, and with Tesco trading on a price to earnings growth (PEG) ratio of just 0.2, it seems to be a strong buy at the present time.
Similarly, food travel company SSP (LSE: SSP) also has great potential as an investment. Although it is expected to report a fall in net profit of 11% in the financial year recently ended, it is forecast to return to growth in the current year. In fact, its bottom line is due to rise by 16% in financial year 2016 which, alongside a price to earnings (P/E) ratio of 25.6, puts SSP on a PEG ratio of 1.6. This indicates that it has significant capital growth potential.
Additionally, SSP has a strong management team, with Kate Swann having delivered impressive financial performance in her previous role as CEO of WH Smith. And, as highlighted in its recent results, like-for-like sales have grown by 3% and operating margins have risen by 60 basis points due to the implementation of efficiency programmes. Therefore, now could be an opportune moment to buy a slice of the business for the long term.