The FTSE 100 supermarket Tesco (LSE: TSCO) has seen a good turn of luck in the recent past, as the lockdown led to a sales spurt. The company’s UK and Ireland sales grew 8.5% according to its latest results released earlier during the week. Its profits grew by a notable 29% too. Investors were impressed with the results, evident from some increase in the Tesco share price following the release. It fell soon after, though, only to rise again, suggesting that investors can’t make up their minds about the stock.
Positives for the Tesco share price
I get it. I really want to get on board with Tesco too. But there are too many pulls in both directions. First, consider the upside. Tesco is one of the dominant grocers in the UK that is in the process of streamlining its business. This includes selling its interests overseas. It may do well in concentrated operations. We’ll know over time how that works. Next, this is the first set of results under Ken Murphy, the new CEO, and it looks good. The broader situation has helped him, but maybe it has something to do with the group’s strategy too.
With the festive season around the corner, TSCO should continue to perform. Maybe the sales won’t be as big as last year, because of the pandemic, but they should still be improved over earlier quarters. The economy’s poised to recover in 2021, which will also continue to support supermarket sales. Last, Tesco’s dividend yield at 4.5% is attractive for passive investors.
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The downside
But the biggest downside is the Tesco share price itself. Despite robust results, it remains underwhelming. Despite this, its earnings ratio is at 19.5 times, which isn’t low. And if I can’t convince you, maybe the Oracle of Omaha can. I had written about how Warren Buffett regretted buying Tesco’s shares last year, and its weak share price trend since is proof of why.
The Tesco share price story is particularly disappointing when so many other FTSE 100 shares are performing quite well. Though to be fair, in general, supermarkets have been sluggish at the stock markets. Competition on the one hand and the shift towards online shopping on the other, are big challenges for the sector. I think the Tesco stock can still turn around, if it’s able to make a big shift towards online shopping. So far the signs look good.
An alternative buy
But for now, I think the better bet is the FTSE 100 online grocer Ocado, which has stood out in 2020 because of the spurt in demand for its services. While the company has itself noted that the spike was a one-off event, the fact is that the odds are now even more in favour of online purchases than before. It’s share price has run up quite a bit this year, but I think for a long-term investor, Ocado’s stock to consider.
