Despite the steady upward momentum of the German value supermarkets, British grocery giant Tesco (LSE: TSCO) managed to perform valiantly in 2016. The stock gained 38% in value during the course of the year.
Investors ploughed into Tesco thanks to a much-improved performance at the checkout in recent months. Indeed, the latest survey from Kantar Worldpanel in mid-December showed the chain gaining market share for the third successive month — Tesco’s take stood at 28.3% as of December 4 versus 28% a year earlier.
But I believe Tesco’s shooting share price is at variance with what is, at best, a mild sales recovery.
The supermarket’s decision to invest more in price-cutting and customer service has undoubtedly achieved no little success. However, the fight against Aldi and Lidl is set to intensify in the months ahead as inflation in the UK heats up in 2017 and puts pressure on shoppers’ spending power.
Tesco faces considerable trouble to keep slashing prices across the store as a still-declining pound heaps stress on its wafer-thin margins. The grocer is already facing a fight to stymie the impact of new store openings by its foreign counterparts.
If Tesco can navigate these problems and keep the tills ringing ever louder, then further share price rises can be expected. Having said that, a toppy P/E ratio of 20.5 times for the year to February 2018 leaves Tesco in danger of a sharp retracement should sales data start to disappoint again, a very real possibility in my opinion.
Precious… But precarious?
Gold digger Randgold Resources (LSE: RRS) also faces an uncertain future in 2017 as a variety of factors tug at precious metals prices.
The commodities colossus saw its share price rise 52% last year as concerns over the fallout of Brexit drove demand for store-of-value assets like gold in the run-up to June.
However, a recovering US dollar, spurred by strong economic data and the consequent expectation of Federal Reserve rate hikes, drove gold values sharply lower during the latter half of 2016. This caused the metal to tip from $1,350 per ounce at the start of July to end the year around the $1,120 marker.
Last month the Federal Reserve suggested that three more interest rate rises could be in store for this year alone. And signs of further progress for the US economy could send gold still lower in the months ahead, and with it Randgold Resources’ share price once again.
And, like Tesco, the mining play’s huge P/E ratio of 21.8 times for 2017 certainly leaves scope for investors to head towards the exits.
Of course the prospect of a lengthy and difficult British withdrawal from the EU could prompt fresh waves of risk aversion across financial markets. And many other issues, from uncertainty over incoming-president Donald Trump’s plans for the US to fears over economic cooling in China and the rest of Asia, could also put gold front-and-centre once again.
Randgold Resources could clearly go either way in 2017.
Be brave and keep buying
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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.