Tesco is the UK’s biggest retailer and makes up one-quarter of the so-called big four supermarkets. The other three are Asda, Morrisons, and Sainsbury. Tesco’s position as the largest provides it with a competitive advantage in my opinion. It also added wholesale business Booker to its portfolio a few years ago.
Tesco shares have been on an upward trajectory since the summer. As I write, shares are trading for 284p. Shares are up 26% from 225p six months ago. Coincidentally, the Tesco share price is up 26% over the past 12 months too. So with this recent rise in share price, should I add the shares to my portfolio?
Should I buy Tesco shares?
To help me make a decision, I have compiled a for and against argument.
FOR: Tesco looks like a bargain at current levels. Based on its current share price, it sports a price-to-earnings growth ratio of just 0.1 The general consensus is that a ratio of under 1 represents a potential bargain. Furthermore, Tesco’s price-to-earnings ratio of just 14 backs up my view. Statista has some excellent information on Tesco and they believe sales growth could rise by over 40% by 2024. If this performance comes to fruition, buying the shares right now could be a master stroke.
AGAINST: Competition in the supermarket sector has always been intense. Tesco has maintained a 25% or above market share against the other three big firms. In addition, German discounters Aldi and Lidl are now making real headway in the UK market. Furthermore, the spate of online-only firms such as Ocado are beginning to gain momentum as well. Growth in sales and increased performance will not be easy to come by.
FOR: Tesco’s market clout as well as size and footprint is one of its competitive advantages. The old adage ‘too big to fail’ springs to mind. Although this does not mean performance can’t suffer, Tesco has a global footprint and has taken steps to streamline operations such as selling its Asian business earlier this year. This will mean it can focus more energy on more lucrative markets such as the UK.
AGAINST: Current macroeconomic pressures such as rising inflation and costs will place pressure on performance and returns. If Tesco can pass rising costs on to customers, it may lose some customers to cheaper competitors. If it decides not to pass on this rising cost, margins will be squeezed. The supply chain crisis as well the shortage of HGV drivers will also affect operations. Right now, there’s no telling how long these problems will last.
Right now I would avoid buying Tesco shares for my portfolio. As a savvy investor, uncertainty is a big red flag. The macroeconomic pressures are off-putting, especially as they could affect Tesco’s performance and any returns. In addition to this, competition is getting much more fierce in the supermarket sector with online disruptors as well.
There are aspects of Tesco I like, which I have mentioned above. However, right now I would probably avoid supermarket stocks like Tesco and buy other shares for my portfolio. I will keep a keen eye on developments, however.
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.