Here’s why I’d buy Tesco shares now!

Tesco shares have risen 26% in price over the past year. However, this year they have stalled. Here, Charlie Keough looks at why he would buy the stock today.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Over the past 12 months, the Tesco (LSE: TSCO) share price has returned a healthy 26% for investors. By comparison, the FTSE All-Share Index has risen 9% in the same period.

However, 2022 has seen Tesco shares struggle. And the stock is currently down 5% year to date. Despite this, I think at the current price, Tesco shares could be a great addition to my portfolio. Let’s see why.

Appealing fundamentals

One of the most appealing factors for me is the firm’s strong fundamentals.

In its Q3 and Christmas trading statement released earlier this year, Tesco said overall sales grew 2.6% year on year. And this was 8.2% on a two-year comparison. This growth was in part fuelled by Tesco’s ability to double its online delivery capacity during the pandemic. And as a result, the business said it had the highest total market share in four years. As a potential investor, these are pleasing results to see.

I also think Tesco is considerably undervalued, especially when compared to its competitors. It currently trades at a price-to-earnings (P/E) ratio of a mere 3.3. For context, one of its main rivals, Sainsbury’s, trades at a P/E of 20.6. This is an attractive factor for me. 

What I also like about Tesco is the stability it can provide during volatile periods. The business is not immune to the side effects of issues such as inflation. However, as my fellow Fool Rupert Hargreaves stated, as long as there is a human need to drink and eat, Tesco’s services will be in demand. This places the firm in a strong position.

Additionally, it has market power to negotiate prices with suppliers, meaning it can keep prices low — in turn drawing in more customers. And when these ideas are added together, it shows just how tempting a proposition Tesco shares are. In fact, supermarkets in general are much in demand at present and last year, rival Morrisons was taken over by a US private equity firm for £7bn

Tesco shares concerns

Yet I do have a few concerns as this is a competitive sector. And cheaper, more affordable stores such as Aldi have been on the rise lately. There is always the threat these businesses steal market share from Tesco. IGD expects the discount grocery market to be worth £34.4bn by 2026. And this growth will be fuelled by the increasing cost of living.

A shortage of workers has also forced Tesco to raise its wages, in turn increasing its labour costs. This will squeeze its margins.

Why I’m buying

Regardless of these potential issues, I am still bullish on Tesco. Its strong results even during the pandemic show the retailer’s resilience. With its low P/E ratio, I also think the stock presents real value. Couple that with the potential stability it can provide during turbulent times and I think Tesco shares would be a great addition to my portfolio. As such, I would buy today.

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.

Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended Sainsbury (J) and 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.

More on Investing Articles

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »