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The Tesco share price is cheap, but I prefer this FTSE 250 stock instead

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I like Tesco (LSE:TSCO) shares and still believe it’s currently a good opportunity. But I believe a FTSE 250-listed investment trust is a better option right now. 

Tesco share price reservations

Like many FTSE firms, the Tesco share price has not returned to pre-crash levels as I write. It’s trading ar 224p per share. Pre-crash it was 320p and this time last year it was 227p.

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So what’s happened? In February, Tesco announced a special dividend and a share consolidation. It returned £5bn to investors but also completed a 15-for-19 share consolidation. This means shareholders of 100 existing shares, would now own 78 new ones. The aim was to balance out the effect of the special dividend so the share price remained the same without causing too much consternation.

Tesco confirmed its full-year results two days ago, a month after preliminary results were announced. Although group sales were up 7.1% on the  year, profits and cash generation were down 28.1% and 29.8% respectively. Net debt stood at £12bn. These results negatively affected the Tesco share price. It’s currently down over 2% this week.

I have reservations about Tesco. Cut-price competitors such as Aldi and Lidl are rapidly gaining market share, which has seen Tesco’s market share decreasing. It also has a large amount of debt. For now, although the Tesco share price is down and relatively cheap in my opinion, I prefer to look to other FTSE stocks for my portfolio.

FTSE 250 opportunity

I’m seriously considering adding F&C Investment Trust (LSE:FCIT) to my portfolio. Investment trusts provide exposure to a range of stocks under one umbrella. Such trusts are designed with a long-term perspective, which suits my style of investing. Unlike Tesco, the F&C share price has surpassed pre-crash levels. As I write this, I can buy shares in F&C for 830p per share, whereas prior to the crash, the shares were at 774p and a year ago they were 665p. 

But the price recovery isn’t the only reason I like F&C. I like that it’s run by fund manager Paul Niven. He’s been with the company for over 25 years and is well respected having overseen years of success. Plus F&C has a diverse portfolio globally. F&C is the oldest investment trust in the world and currently invests in over 400 companies in 35 countries. I’m a fan of tech stocks and some such F&C has in its portfolio are Amazon, Apple and Microsoft. Finally, it has an excellent record of growth and achievement. I know past performance doesn’t guarantee future success, but it’s a good indicator for me. F&C recently announced it would be increasing dividends for a 50th consecutive year too.

Risk and reward

Like Tesco, F&C has its own risks. It invests heavily in emerging markets. Such markets are often susceptible to volatility, which can stem from political upheaval or natural disaster. These events can affect economic growth. Currently, F&C has its third largest asset allocation in emerging markets. If cases of Covid-19 rise, especially in countries where F&C has invested, it could also have a negative effect.

Yet I would prefer to buy shares in F&C rather than invest my money in Tesco. F&C offers me greater protection through diversification. It also has a strong track record and history of success. I believe it can cope well with short-term volatility and flourish long term.

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Jabran Khan has no position in any shares mentioned. The Motley Fool UK has recommended Tesco. 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.

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