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Is Now The Time To Buy Tesco PLC?

TescoWhere can you find your investment ideas? You can search the web, analyse financial statistics, and read investment publications such as the Fool.

Or you can just look around you. Your experiences in your life, whether you are at work, in the shops or anywhere else, are invaluable. Growth guru Phil Fisher called it ‘scuttlebutt’. Peter Lynch used to talk about it all the time. Always take investment advice with a pinch of salt — really, you need to see for yourself.

Competition as fierce as I have ever seen

 I have recently been quite negative about the supermarkets. Competition is an amazing thing, but I doubt I have ever seen competition as fierce as the supermarket business today. First Sainsbury price matches Tesco (LSE: TSCO). Then Waitrose joins in. Asda claims it is the cheapest supermarket. Most supermarkets have loyalty cards. Consumers are flooded with offers, coupons and deals.

You can shop in big, out-of-town hypermarkets, small town-centre shops, you can buy on-line and have it delivered, or you can click-and-collect. There are low-cost shops, the mainstream, and shops that provide a premium experience.

But is the buzz returning?

I had been quite concerned that Tesco was buckling under the weight of so much competition. But, just the other week, I noticed that my local Tesco was busier than I had seen it in months. The tills were packed, and the buzz had returned to the store. I also noticed I was spending as much in the store as I had ever done.

Of all the supermarkets, Tesco has the most financial strength to compete in a price war. It is competing fiercely at the moment.

Investing is strongly dependent on momentum. Since the mid-1990s there has been a strong upward trend, which drove Tesco’s share price higher, peaking in 2007. But since then there has been a downward trend. Turning the company around won’t be easy. It’s rather like a super-tanker  — you can alter the steering quickly, but it takes time for the ship to actually change direction.

It is a real challenge to arrest Tesco’s decline. Yet I see promising signs that Tesco’s share price may be bottoming-out. A P/E ratio of 10, with a dividend yield of 5%, is cheap, and consensus expects profitability to hold steady in the next few years.

Is now the time to buy Tesco? Could it be a contrarian buy? Well it is certainly time to add the company to your watch list, ready to buy on the dips.

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Prabhat owns shares in none of the companies mentioned in this article. The Motley Fool owns shares in Tesco.