Last week saw a severe plunge in the markets on a scale not seen since the 2008 financial crisis. Investors are now faced with a chance to rummage through the FTSE 100, shifting between high-income or growth stocks, finding sanctimony in a sea of fear.
The question you must ask is, in my opinion, where will opportunity be found?
A great buying opportunity right now
At the time of writing, Tesco (LSE: TSCO) shares have fallen to 225p amongst the market sell-off. Meanwhile, a dividend yield of 3.4% is offered.
Tesco shares have performed strongly in the past. From a low of 150p in 2015, the share price rose nearly 70%, trading at highs of 255p in February 2020.
I believe the combination of this dividend and an undervalued share price could yield a 6% per annum return. If you’re bullish for Tesco’s future, that’s a tidy discount.
I think Tesco is now a capital-disciplined organisation and a cash compounder. Complementary acquisitions have helped Tesco to expand overseas more aggressively, gaining a firm foothold in international grocery markets. In doing so, this has placed Tesco in a unique position in wholesale markets worldwide.
The ability for Tesco to adapt and recover from profit losses is impressive. Net profit should come in at £1.7bn for fiscal 2020, rising to £1.8bn for fiscal 2021 — double the £974m net profit figure reported in 2014.
In my opinion, earnings growth is one of the many reasons why the group’s profits have surged over the past two years.
Every little helps
Competition with Sainsbury’s has placed pressure on Tesco’s financial performance in the past. In my opinion, Tesco has managed to keep its head above water despite its past struggles.
Under Dave Lewis, Tesco has repaired its profit margins and returned to growth. Debt levels are down and the whole business appears to be much healthier than it was five years ago.
Miraculously, Tesco’s net income jumped from £138m in 2016 to £1.3bn at the end of 2019. Analysts also expect earnings to rise by about 8% in 2020/21.
At the time of writing, Sainsbury’s reported an operating margin of 1.9% and a return on capital employed of 33%. In contrast, the figures for Tesco were 4% and 6.4%. I believe these figures alone show how Tesco has a leading competitive edge.
Perhaps every little does help after all.
John Wallace owns shares of Tesco. 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.