Tesco (LSE: TSCO) is the nation’s biggest supermarket chain, with a 27.3% market share, according to Kantar — J Sainsbury is second with 14.9%. In these troubled stock market times, investors are abandoning high-risk stocks and heading for safety. So why then is the Tesco share price falling?
Tesco shares have shed 14% since January. And they’re still well below their pre-pandemic level. I think that makes Tesco a buy.
Biggest fall since… very recently
The Tesco share price dip is all down to households reining in their spending in the face of inflation. According to the British Retail Consortium, retail sales are dropping at the fastest rate since the pandemic lockdown.
Headline-grabbing though that may be, lockdown was only relatively recent. And even a small fall would surely be the biggest since lockdown, wouldn’t it?
The dip covers overall retail shopping too, including all sorts of discretionary items. The biggest falls have been in furniture, home appliances and computing. So not food then.
Tesco is surely suffering from squeezed spending. But when it comes to the retail sector, food must be about the safest thing to invest in.
Why I think Tesco is best
When economic times are tough and we’re looking for safe investments, I reckon that’s the time to go for the biggest and best in the sector. We’ve only recently seen an example of Tesco’s market muscle, after the supermarket’s spat with Heinz.
Tesco decided to stop stocking some of its lines in a row about pricing, but the two have come to an agreement. It takes a company with serious financial clout to get such a global food giant to compromise. And that has to be good for shoppers, and for overall revenue.
Past the bottom?
Talking of which, Tesco’s market share has actually grown a bit since last month, while Sainsbury’s has dropped back a little.
And the news of the latest fall in retail has had little effect on the Tesco share price, which has actually been strengthening a little since a mid-June trading update.
Competition from Lidl and Aldi has always been a threat. But for Q1, Tesco reported 19% year-on-year growth in its Aldi Price Match and Low Everyday Prices products. Total retail sales actually rose 2% like-for-like.
Where’s the downside?
Despite my bullishness, there clearly are still risks. Q1 trading doesn’t reflect the inflation ramp-up, so we’ll have to wait to hear about that.
And if we’re in for a second half of the same kind of inflationary pressure on shoppers, Tesco share price weakness might well continue. But what counts for me is valuation.
We’re looking at a forecast price-to-earnings (P/E) ratio of around 12. That might not look like a screaming buy. But this is the biggest player in its market, in a sector known for safety, at a time when investors are prioritising safety.
I think investors who buy now will do well in the long term. And it appears Tesco does too, as it’s just kicked off the latest instalment in its £750m share buyback programme.
