Is Now The Time To Invest In Tesco plc, J Sainsbury plc And McColl’s Retail Group plc?

Stock market turmoil could have uncovered value in Tesco plc (LON: TSCO), J Sainsbury plc (LON: SBRY) and McColl’s Retail Group plc (LON: MCLS)

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Are there any bargains in the food-retailing sector? Today I’m looking at Tesco (LSE: TSCO), J Sainsbury (LSE: SBRY) and McColl’s Retail Group (LSE: MCLS).

Is the challenge too great?

At 197p, Tesco’s forward price-to-earnings (PER) ratio runs at about 19. That’s high. Those hoping for a turnaround in fortunes are already seeing a lot of that priced in.

City analysts following the firm expect earnings to bounce back by around 38% for the year to February 2017. However, looking at the recent interim report, the scale and scope of the firm’s problems is evident in the sub-headings chosen to list remedial actions the company is taking. Those sub-headings read:

Should you invest £1,000 in Diageo right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Diageo made the list?

See the 6 stocks

  1. Regaining competitiveness in core UK business,
  2. Protecting and strengthening the balance sheet,
  3. Rebuilding trust and transparency.

A firm that has lost its competitive position in its core business, has a weak balance sheet and which has lost transparency (and the trust of its customers and investors) has a long way to travel to return to former glories.

Naturally, Tesco is making some progress. Yet, I think the task remains too large. On top of the firm’s internal problems, changes in the supermarket sector strike me as structural this time, and the challenges facing Tesco seem likely to intensify, not subside.

In all firms, it can help to gauge the directors’ view of a business’s progress and future prospects by looking at decisions regarding dividends. I see that Tesco is not offering an interim dividend this time. Tesco is not for me.

No growth on the cards

Since last month’s second-quarter update, where Sainsbury’s said it expects full-year underlying profit before tax to be moderately ahead of expectations, the shares have elevated by 21%. At today’s 274p share price, the forward PER sits at about 13 for year to March 2017, and the forward dividend yield runs at around 3.8%, with forward earnings covering the payout twice.

City analysts following the firm don’t expect any growth, though. They think earnings will decline 20% during the current year and 1% next year. Sainsbury’s faces the same structural challenges that Tesco faces, with nimble, discounting competition such as Aldi, Lidl and others attacking industry margins and biting chunks from the big supermarket operators’ market shares.

Sainsbury’s is busy applying similar root-and-branch measures to ensure its survival. Like Tesco, Sainsbury’s is treading water rather than realigning itself for growth, I feel. As such, the firm’s valuation looks pricey to me. I’d much rather see single-digit PERs and dividend yields well above 5% from the big supermarket operators such as Sainsbury’s and Tesco. So, this one is not for me either.

Growing market share

Tesco and Sainsbury’s are both active in the local convenience store market, but McColl’s Retail Group specialises in that sector. As such, the firm is without the encumbrance of a big supermarket estate and all the difficulties that come with it.

McColl’s has over 1,300 stores throughout England, Scotland and Wales and is expanding fast. Unlike Tesco and Sainsbury’s, McColl’s directors’ focus is on growth initiatives rather than survival measures.

Today’s 149p share price throws up a forward PER of just under 10 for 2016 and the dividend yield runs at around 6.8% with earnings expected to cover the payout 1.5 times. The firm seems well worth further research and attracts me more than the big supermarket goliaths.

Should you invest £1,000 in Diageo right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Diageo made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Content white businesswoman being congratulated by colleagues at her retirement party
Investing Articles

Age 60 and looking for income? 3 FTSE 100 shares yielding 6%+ to consider

Harvey Jones picks out three FTSE 100 shares that offer a juicy passive income stream. Older investors should consider them,…

Read more »

UK money in a Jar on a background
Investing Articles

One of Britain’s best dividend shares is soaring! Time to buy?

Our writer's been looking for shares to buy. One of the biggest UK dividend payers has caught his eye. Could…

Read more »

Thoughtful man using his phone while riding on a train and looking through the window
Investing Articles

£100, £1,000, or £100,000? Here’s how much it takes to start investing in shares!

Does it take a large sum of money for someone to start investing in the stock market? Our writer doesn't…

Read more »

Close-up of a woman holding modern polymer ten, twenty and fifty pound notes.
Investing Articles

£20,000 in an ISA? Here’s how it could target £1,250 a month in passive income

A Stocks and Shares ISA can be a platform for someone with spare cash to set up a sizeable second…

Read more »

Close-up as a woman counts out modern British banknotes.
Investing Articles

3 UK shares I own for easy passive income

Christopher Ruane runs through a diverse trio of UK shares he currently owns, each of which generates passive income in…

Read more »

UK coloured flags waving above large crowd on a stadium sport match.
Investing Articles

Is the UK-US trade deal a brilliant buying opportunity for FTSE 100 shares?

A long-awaited trade deal has been struck between the UK and the US, but how much will FTSE 100 stocks…

Read more »

UK supporters with flag
Investing Articles

3 growth stocks up 27% in a month to consider buying now

Stock market volatility has been a brilliant opportunity to buy growth stocks, which are now rebounding at speed. Harvey Jones…

Read more »

Young happy white woman loading groceries into the back of her car
Investing Articles

This FTSE 250 stock has returned over 300% since 2020

After missing out on a 300% return from a FTSE 250 stock five years ago, Stephen Wright is ready for…

Read more »