Should You Sell Tesco PLC And Buy Big Fallers Poundland Group PLC and Sports Direct International Plc?

The Tesco PLC (LON:TSCO) rebound has left the shares looking quite pricey. Are Poundland Group PLC (LON:PLND) and Sports Direct International Plc (LON:SPD) a better buy?

| 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.

It’s been a tough six months for investors in Poundland Group (LSE: PLND) and Sports Direct International (LSE: SPD). Shares in both companies have fallen by about 50% since last September.

This sinking feeling will be familiar to many Tesco (LSE: TSCO) shareholders, but times seem to be changing. Tesco shares have risen by 30% so far in 2016, leaving shareholders who bought-in at the end of last year with a fat profit.

Of course, many longer-term investors — including me — will still be underwater on their Tesco holdings. Unfortunately that situation could continue for several more years.

Tesco’s earning power looks likely to have been permanently damaged by the supermarket price war and the firm’s own financial problems.

What’s important now is for us to see where the best opportunities lie for the future. Can Tesco keep climbing, or are bigger potential profits on offer at Poundland and Sports Direct?

Tesco

Tesco shares currently trade on a massive 42 times 2015/16 forecast earnings. Earnings per share are expected to double to 8.7p in 2016/17, reducing the supermarket’s forecast P/E to 22.

However, that’s still high. I’d argue that a P/E of about 12 would be more realistic for a low-growth, low-margin business like this. That implies earnings per share of about 16p, which doesn’t seem likely for another 2-3 years.

Tesco isn’t expected to pay a dividend for the current year, either. Consensus forecasts suggest a payout of just 1.33p per share for next year. I suspect that most of Tesco’s recovery potential is already reflected in its share price.

Poundland

After a promising start following its 2014 flotation, things have gone downhill for Poundland. Earnings per share are expected to fall by 26% to just 9.8p this year. This leaves the stock on a 2016 forecast P/E of 17.

Earlier this week, the firm’s chief executive announced his intention to stand down, suggesting he isn’t overly optimistic about a quick recovery.

However, Poundland does have some redeeming features. The group had net cash of £66m at the end of September. It generated enough free cash flow to comfortably cover last year’s 4.5p per share dividend.

If Poundland can complete its integration of the 99p Stores chain and find a new boss to address recent sales disappointments, then earnings could rise strongly.

Sports Direct

Shares in Sports Direct have plummeted in recent months, thanks to a wave of bad press and a profit warning in January.

Analysts have adjusted their forecasts accordingly. Sports Direct is now expected to generate earnings of 37.3p per share for the current year, down by 5% from 39.4p per share last year.

This means that at the current share price of 400p, Sports Direct has a forecast P/E of about 10.5. That doesn’t seem expensive for a business with almost no debt and an attractive 9% operating margin.

Offsetting this are the risks involved in investing in a company that pays no dividend and has a very active controlling shareholder. I’m not sure how closely founder Mike Ashley’s interests are aligned with those of ordinary shareholders.

Despite these concerns, a turnaround seems quite likely to me. At 400p, the shares could be decent value.

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.

Roland Head owns shares of Tesco. The Motley Fool UK has recommended Sports Direct International. 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

Person holding magnifying glass over important document, reading the small print
Investing Articles

Just released: our top 3 small-cap stocks to consider buying in October [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

How I’d use an empty Stocks and Shares ISA to aim for a £1,000 monthly passive income

Here's how using a Stocks and Shares ISA really could help those of us who plan to invest for an…

Read more »

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »