If I had to buy any supermarket stock as part of my diversified holdings, I’d snap up Tesco (LSE: TSCO) shares in a heartbeat. In fact, I’m looking to buy some shares as soon as I have some spare funds to invest.
Let me break down my investment case.
Tesco shares on the up
When economic turbulence began to rear its ugly head, byproducts, including a cost-of-living crisis, came with it.
High inflation, higher interest rates, higher energy and food costs had consumers worried. The risks involved, and these are ongoing too as we’re not out of the woods yet, are that of tighter margins, and increased prices driving consumers to cheaper competitors for businesses. Tesco’s earnings and returns could be dented, which is something I’ll keep an eye on.
Speaking of competitors, European disruptors Aldi and Lidl have taken the UK market by storm. They continue to grow in presence and popularity. I’ll keep an eye on the war they’ve waged on Tesco, and the other dominant UK players such as Asda, Morrisons, and Sainsburys.
However, despite the issues mentioned, the Tesco share price has fared well in the past 12 months. The shares are up 23% in this period, from 251p at this time last year, to current levels of 310p.
Why I’d buy the shares
Moving away from the cons, here’s why I’d happily buy some shares:
- Market presence, track record, and brand power. Although this may sound pretty simple, I personally believe you can rarely go wrong with the biggest fish in the pond. This is especially the case when that fish has a good track record of performance, and an excellent coverage across the marketplace. In Tesco’s case, this includes access to, and a presence in, international markets. However, I do understand that past performance is not a guarantee of the future.
- Defensive operations. In my view, supermarkets possess defensive abilities. This is because no matter the economic outlook, people need to eat and clean themselves and their homes. This defensive ability offers me peace of mind that there could be a level of stability to earnings, barring any major issues.
- Solid fundamentals. Here I’m referring to the shares’ valuation, and passive income opportunity. At present, the shares trade on a price-to-earnings ratio of just 12. This looks cheap to me compared to a peer group average P/E ratio of 23. Next, a dividend yield of just under 4% is attractive. Plus, if the business can continue its dominant status in the UK, earnings and returns could grow. However, I do understand that dividends are never guaranteed.
Final thoughts
Despite some potential pitfalls that could hurt the business, Tesco shares could be a good opportunity for me to boost my wealth.
This is exactly the type of stock I’d buy and hold. I’d leave it in my portfolio for a number of years to gain capital growth and dividends.
For me, the pros of buying some shares outweigh the cons by some distance.
