Could Sinking Tesco PLC & Flying ARM Holdings plc See Their Fortunes Reverse?

Tesco PLC (LON: TSCO) and ARM Holdings plc (LON: ARM) have seen wildly differing fortunes in recent years, and Harvey Jones suspects this will continue

| 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.

Life is swings and roundabouts, and so is investing. What goes up all too often comes down, and if you are lucky, it works the other way round as well.

Supermarket giant Tesco (LSE: TSCO) and microchip manufacturer ARM Holdings (LSE: ARM) are two companies that have been surging in different directions for some time. Over the last five years, Tesco is down a hellish 55%. Over the same period, ARM is up a heavenly 215%. To the novice investor ARM would clearly look the better prospect, it is hard to argue against momentum. But life is full of surprises, and maybe today’s down-and-outer could be tomorrow’s up-and-comer (and vice versa).

Korean Opportunities

Tesco keeps falling, down 20% in the last six months, after hopes that new boss Dave Lewis would chart a course towards smoother waters ran aground. Drastic Dave has a far bigger job on his hands than he can have guessed when he signed up to salvage what is still the UK’s number-one grocer. He has finally offloaded South Korean unit Homeplus, which was sold for £4.2bn, but that cash injection counts for little when market share keeps on plummeting.

It is hard to put too much faith in Tesco’s turnaround prospects with latest Kantar figures showing sales down 1.1% in the 12 weeks to 11 October and share down to 28.1% from 28.8%. The fact that Tesco has been forced to slash prices like everybody else only makes matters worse. Near-zero inflation and rising wages should be putting more money into shoppers’s pockets but grocery deflation has wiped out the benefit. Tesco’s forecast operating margins are now just 1.1%. Under former boss Philip Clarke it was targeting 5.2%.

Fresh Mess

If the onslaught from Aldi and Lidl wasn’t bad enough, next year Tesco must contend with the full-launch of Amazon Fresh, which Kantar claims could “be a major disruptor, bringing down average basket sizes, accommodating on demand shopping, and accelerating the growth of the whole online market”. At 19.42 times earnings Tesco isn’t even cheap and there is no dividend either. Two years ago I swept all the supermarkets at my portfolio and I see little reason to return to Tesco now.

Strong ARM Tactics

I was wise to sell Tesco then but daft to sell ARM Holdings just before it became what would have been my first four-bagger. Despite posting encouraging fourth-quarter results in February the stock was caught up in the wider US tech market sell-off in March, one of those irrational bouts of selling that cool-headed long-term investors should welcome like desert rain. It hit a nadir of 825p on Black Monday in August but has since confirmed its class, rebounding 28% to today’s 1057p.

ARM’s Q3 results showed a pretty fab 37% year-on-year increase in processor royalty revenues, and 17% rise in overall revenues to $375.5m. Semiconductors is a competitive market but ARM not only has an edge, but seems to be sharpening it by the day. It recently claimed that its revenues will outpace the market by 15% in the medium term and the faster it grows, the more it can invest in R&D, and the harder it will be for competitors to catch up.

ARM still looks young and hungry, Tesco looks tired and bloated. That has been the story of recent years, and I can’t see any reason for it to change now.

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.

Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended ARM Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

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

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »