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3 reasons why I think the Tesco share price can rise

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A shopping basket filled with Tesco own-brand goods
Image: Tesco

Tesco (LSE: TSCO) had a good year last year, partly due to the pandemic which increased food consumption at home. The Tesco share price too responded to these positive developments, albeit in fits and starts. 

Weak share price trend

But 2021 has not been quite as positive for the Tesco share price. It saw one big fall in February, when it decided to consolidate shares. That says nothing about the company or investor perception of it.

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Nevertheless, in the months following, its share price trend has been underwhelming. In the two-and-a-half months since February, the Tesco share price has increased only by some 4%. There has admittedly been much fluctuation, but the broad trend is flat. 

By comparison, from the time that the stock market rally started in November last year up to early February this year, the Tesco share price gained over 21%. 

Why the Tesco share price lost momentum

So why has the Tesco share price lost momentum?

I see one very good reason for this. Its recent results were a mixed bag. While revenues showed healthy growth, Tesco is not confident that these growth rates will be sustained. Also, its profits are growing more slowly. 

This is underwhelming to me as an investor, especially at a time when many businesses that lost out last year because of the pandemic are picking up pace. 

Why the Tesco share price can rise now

But I think there are at least three reasons why the Tesco share price can rise from here. 

One, economic growth is expected to pick up significantly over the rest of the year. I think this will show up in more consumer spending on all kinds of goods and services. And that includes shopping from supermarkets like Tesco. Moreover, if this is going to be a long-term boom fuelled by government spending and relaxed interest rates, it would continue to benefit. 

Two, Tesco’s performance is better in comparison to peers. For instance, the supermarket Morrisons, has shown a far bigger operating profit fall of 51% for the last financial year compared to the year before. In comparison, Tesco’s operating profit has fallen by 21.5%. Further, Sainsbury’s actually clocked a loss during the year. 

Three, increased Covid-19 costs have played a big part in driving profits down. As these come off in this year and the next, not just Tesco but all supermarkets can show healthier profits. 

My takeaway

Of course, as an investor I can turn around and ask why I need to buy shares of supermarkets at all. To that, the answer is that a grocer like Tesco now looks cheaper than many other FTSE 100 stocks with a price-to-earnings (P/E) ratio of 24 times. If its performance does remain relatively strong, I reckon investor interest will return to it. 

But I am waiting for the next update to see what happens before I make my decision. 

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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons and 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.

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