The Motley Fool

Forget the Tesco share price. I’d buy this FTSE 100 champion instead

Image source: Getty Images

Tesco (LSE: TSCO) is a FTSE 100 stock that tends to divide opinion. On one hand, you have investors who believe the Tesco share price offers a lot of value. On the other, there are those who are concerned about the level of competition the supermarket giant is currently facing.

Personally, I’m in the latter camp. Here, I’ll explain why I see little appeal in Tesco shares right now, and highlight a FTSE 100 stock I’d buy instead.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Losing market share

The issue I just can’t get past with Tesco is the threat of Aldi and Lidl as well as online grocer Ocado. Just look at the recent supermarket sales data from research firm Kantar.

According to Kantar, for the 12 weeks to 30 December, sales at Tesco fell 1.5% compared to last year, with its market share decreasing 0.4 percentage points to 27.4%.

By contrast, Aldi’s sales were 5.9% higher, with its market share growing 0.4 percentage points to 7.8%, while Lidl enjoyed sales growth of 10.3%, which pushed its market share up to 5.9% from 5.3% last year. Combined, the German discount supermarkets had a market share of 13.7% – more than treble what they had a decade ago, which gives you an indication of the growth they’ve achieved.

Meanwhile, the UK’s fastest-growing supermarket, Ocado, registered sales growth of 12.5% over the period.

Worryingly, in Tesco’s recent third quarter and Christmas trading update, chief executive Dave Lewis said: “We performed well.” If that’s the case, I’d hate to see a poor performance.

Tesco shares currently remain a long way below their 2007 highs of around 500p. However, that doesn’t necessarily mean the shares are now a bargain. In my view, the supermarket landscape has been permanently disrupted over the last decade and Tesco has lost its competitive advantage. With the stock trading on a forward-looking P/E ratio of 14.5, I don’t see much investment appeal.

Going from strength to strength

One FTSE 100 stock I’d buy over Tesco is Legal & General Group (LSE: LGEN). It trades at a lower valuation (forward-looking P/E ratio of about 9.2) and sports a much a higher dividend yield as well. Currently, the prospective yield is nearly 6%, versus 3.4% for Tesco.

Unlike Tesco, Legal & General appears to have plenty of momentum at the moment. For example, in a trading update in November, the group advised that its institutional retirement business (which helps companies offload their pension risk) had completed £8.5bn worth of deals in the first 10 months of 2019 and that it had a pipeline of deals worth £3bn it was expecting to complete by year-end. In 2018, deals totalled £9.1bn, so that looks like a decent performance.

Additionally, the group advised that its investment management business had achieved external net flows of £83bn in the year to 31 October and that assets under management at 31 October were £1.2trn, up £200bn since the start of the year.

It’s also worth noting that CEO Nigel Wilson said the business “continues to go from strength to strength” and that management remains confident in the group’s ability “to grow sustainable profits over the long-term.”

All things considered, I see considerable investment appeal in Legal & General shares right now. Given the group’s momentum and the stock’s low valuation, I believe LGEN is a better long-term buy than Tesco shares.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Edward Sheldon owns shares in Legal & General Group. The Motley Fool UK has recommended Tesco. 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.

Where to invest £1,000 right now

Renowned stock-picker Mark Rogers and his select team of expert analysts at The Motley Fool UK have just revealed 6 "Best Buy" shares that they believe UK investors should consider buying NOW.

So if you’re looking for more top stock ideas to try and best position your portfolio in this market, then I have some good news for your today -- because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.