Recessions are typically equal opportunity offenders, impacting stock prices across the board. But the latest one accompanied a lifestyle change for us because of the lockdowns. This has given respite to some stocks. The FTSE 100 grocery retailer Tesco (LSE: TSCO) is one such instance. It saw limited share price falls in the stock market crash.
It’s even less likely to fall after the company’s healthy trading update was released. The question now for me, though, is whether the Tesco share price is likely to rise enough to make a good growth investment.
There’s a very particular reason why I’m asking this question. While the Tesco share price didn’t drop much in the stock market crash, it hasn’t run up very much in 2020 either. In fact, it’s average share price in 2020 is barely changed from that in 2019.
Can the Tesco share price rise?
Maybe the latest trading update can provide some much needed impetus to the Tesco share price. The update for the 13 weeks to 30 May 2020 shows a healthy sales increase of 9.2% in UK and Ireland. Notably, online sales saw a huge jump of 48%, in keeping with the overall trend of rising e-commerce. Positive as this development is, the Tesco share price will gain from it only if this trend can be sustained. I’m not sure it can. The update says that while consumers shopped less frequently during the lockdown period, they bought more.
Clearly, many of us were trying to buy more each time to reduce exposure to public places, where the likelihood of contracting coronavirus was higher. But since we’ve made bulk purchases now, it’s likely that we are more stocked up than usual, unless we bought a lot of perishables. As a result, the spending per shopping trip could fall in the near future. I think investors had already factored in a one (or two) time sales spurt before the update. I say this because the Tesco share price hasn’t moved since the update as I write.
Further, there’s a downside too. The supermarket has seen increased Covid-19-related costs, which are only partially met by the sales’ increase. Moreover, it’s in stiff competition with other chains like Aldi, which can keep its bottom-line muted. While Tesco seems to have benefited from its competitive price-cutting strategy this time, it remains to be seen whether it can be sustained.
At 23.1 times, Tesco’s price-to-earnings ratio (P/E) isn’t exactly low either. To compare, it’s higher than that for the FTSE 100 pharmaceuticals and healthcare giant, GlaxoSmithkline, which is at 15.1 times. It’s still one of the few FTSE 100 stocks with a reasonable dividend yield (of 4%), but I’m less convinced that it’s among the best growth stocks. I’d consider it for a passive income, but wait for future sales trends before investing in the Tesco share price at the present levels for capital growth. I’m looking out for its future online sales’ growth in particular.
Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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.