Tesco shares have climbed 31% in a year. Now what’s in store?

Tesco shares have been flying. However, this Fool thinks they’ve got more to give. He explains why he’d buy the stock today.

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It’s been a strong year for Tesco (LSE: TSCO). Investors who bought shares 12 months ago would be sitting on a 31.4% gain. The FTSE 100‘s up 8.6% in the same period.

But after stringing together a great performance, is it time I dived in and snapped up some shares? Let’s explore.

I’m bullish

I’ve been tracking Tesco lately for a few reasons. The first is because it’s a defensive stock. I want to add more of these to my portfolio. They provide stability. Come rain or shine, people need to eat and drink. As a result, Tesco should always enjoy a steady demand.

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Over the long run, that can prove to be beneficial for a stock. The FTSE 100’s up 12.6% in the last five years. The retail giant, on the other hand, is up 19.6%.  

Created with Highcharts 11.4.3Tesco Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Market share

Couple that with Tesco’s dominant market share and I really like the look of the stock. Tesco has a 27.7% market share. That puts it far ahead of any other player in the industry. Sainsbury’s is the closest with a 15.3% share. Its leading position comes with plenty of benefits.

The rise of Aldi

I’ve been quick to explain why I like the look of Tesco. However, I do see risks. The main one is rising competition. More specifically, the growth of budget supermarkets Aldi and Lidl.

Every year they seem to become more popular with shoppers. That’s been catalysed over the past couple of years with the cost-of-living crisis forcing consumers to shop around for the cheapest products. Aldi’s 10% market share’s proof of that.

In the years to come, it’ll be interesting to see how Tesco reacts to their ongoing rise.

It has introduced measures such as Aldi price match. But the German chain has its eyes firmly set on taking a greater share of the market. Earlier this year, Aldi announced a £550m investment to fuel its UK expansion plans. I’ll be keeping close tabs on this.

Next in store?

So considering all the above, what could the next year have in store for the Tesco share price?

Analysts seem to think we won’t see too much growth. Of the 12 analysts offering a 12-month target price, the average is 336.6p. That represents just a 2.5% premium from its current price. Granted, the high target price is 370p, which is 12% higher. Then again, the low is 240p, which is 27.4% less.

Of course, analysts’ forecasts can be wrong. Nevertheless, they can be used by investors as a guide.

Maxed out?

Based on the little growth forecast for the next year, are Tesco shares maxed out for now?

I don’t think so. They trade on 13.5 times earnings. That’s above the FTSE 100 average. But it still looks like good value to me. Looking ahead, the stock trades on 12.5 times forward earnings.

I’m not expecting Tesco to produce another 31% rise over the next 12 months. But even so, I certainly reckon it’s a stock that has plenty of qualities to make it a good addition to my portfolio. If I had the cash, I’d buy some shares today.

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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 J Sainsbury Plc and Tesco Plc. 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.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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