The Motley Fool

Is the Tesco share price too cheap to miss?

Image: Tesco

At first glance it might look as if the Tesco (LSE: TSCO) share price has been a nightmare over the past year. The FTSE 100 supermarket is down more than 20% since this point in 2020 due to last month’s share price collapse. The absence of significant dip-buying in the aftermath might suggest that there are big problems at Britain’s biggest retailer, too.

The Tesco share price hasn’t fallen due to some fundamental worsening of its business or some other seismic event though. You could in fact say that the drop reflects the mechanics of the market. Put simply, Tesco raised £5bn by selling its struggling operations in Asia. It then distributed the proceeds to its shareholders in March by way of special dividends. Finally it reduced the number of shares in circulation (known as a share consolidation) to offset the impact of these one-off dividends. That caused the fall.

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...

The Tesco share price looks cheap!

The important question facing investors today is whether the Tesco share price provides good value right now, and whether or not it can rise over the long term.

On the first point the FTSE 100 firm certainly looks like a great value stock to buy, at least in my opinion. City analysts think Tesco’s share price will rise almost 60% in the current fiscal year (to February 2022). This results in a forward price-to-earnings growth (PEG) ratio of 0.2.

A Tesco employee chatting with a customer

Investing theory suggests that any reading below 1 might mean that a share is undervalued by the market. Don’t think that this is the only reason why the Tesco share price provides top value right now, however. The supermarket’s dividend yield sits at 4.2% for this financial year. Compare this with the 3.5% forward average that UK shares currently offer.

A sting in the tail

I do love bargain hunting when I’m looking for UK shares to add to my Stocks and Shares ISA. But Tesco isn’t a share I’m considering buying, not even for a second. The main reason for this is because of intense competition in the British grocery sector which is hammering margins and decimating the customer bases of the country’s established firms like Tesco.

It’s no coincidence that Tesco’s share price has slumped 54% over the past 10 years, a period in which Aldi and Lidl’s have expanded rapidly in the UK. Over the past decade premium supermarkets like Waitrose have also grown their market share, whilst the likes of online-only operator Ocado have also emerged to pull shoppers away from Tesco. The pressure looks set to intensify too, with the likes of Aldi now operating online and Amazon launching bricks-and-mortar operations in recent months.

On the plus side, Tesco has one of the best online operations in the business. This should stand in its favour as e-commerce activity balloons. Additionally, Tesco has the sort of scale which none of its competitors (bar Amazon) can match, which could help it bounce back strongly this decade. But I don’t think that these points outweigh the risk of growing competition. So I’d rather buy other UK shares today.

A Top Share with Enormous Growth Potential

Savvy investors like you won’t want to miss out on this timely opportunity…

Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this ‘pure-play’ online business (yes, despite the pandemic!).

Not only does this company enjoy a dominant market-leading position…

But its capital-light, highly scalable business model has previously helped it deliver consistently high sales, astounding near-70% margins, and rising shareholder returns … in fact, in 2019 it returned a whopping £150m+ to shareholders in dividends and buybacks!

And here’s the really exciting part…

While COVID-19 may have thrown the company a curveball, management have acted swiftly to ensure this business is as well placed as it can be to ride out the current period of uncertainty… in fact, our analyst believes it should come roaring back to life, just as soon as normal economic activity resumes.

That’s why we think now could be the perfect time for you to start building your own stake in this exceptional business – especially given the shares look to be trading on a fairly undemanding valuation for the year to March 2021.

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

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Ocado Group and Tesco and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. 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 click below to discover how you can take advantage of this.