It’s been a rollercoaster 2016 thus far for Tesco (LSE: TSCO), with its shares up as much as 35% at one point before crashing to now be up 4% year-to-date. Still, they’re 6% ahead of the FTSE 100 and look set to continue this level of outperformance in future.
A key reason for this is Tesco’s strategy. It’s very simple but could prove to be very effective. That’s because it’s disposing of a number of non-core assets that have arguably made the retailer become bloated and inefficient over the years. Furthermore, it’s improving the efficiency of its supply chain, cutting costs and improving customer service. Together, these changes should result in a leaner, more profitable and better-performing Tesco.
With Tesco forecast to increase its bottom line by 146% in the current year and by a further 40% next year, there could be a step-change in investor sentiment over the coming years. And with it trading on a price-to-earnings-growth (PEG) ratio of only 0.4, Tesco seems to offer a wide margin of safety, which should mean that it easily beats the FTSE 100.
Two to watch and wait
While Tesco has beaten the FTSE 100 thus far in 2016, Topps Tiles (LSE: TPT) is down by 15%. That’s at least partly because of fears surrounding the outlook for the UK and global economies, with GDP figures being viewed as at risk of coming under pressure. As a relatively cyclical business, this could hurt Topps Tiles’ top and bottom line performance and cause its share price to continue to underperform the wider index.
With Topps Tiles forecast to increase its earnings by 6% this year and by a further 8% next year, it seems to be performing in line with the wider index. However, with the company having a PEG ratio of 1.8, its shares seem to offer little margin of safety. Therefore, its risk/reward ratio appears to be unfavourable and while in the long run Topps Tiles could perform well in a booming economy, for now it may be prudent to await a lower share price before piling-in.
Meanwhile, Safestyle UK (LSE: SFE) has outperformed the FTSE 100 by around 10% since the turn of the year. That’s despite it being arguably a more cyclical company than Topps Tiles and the fact that Safestyle is forecast to increase its bottom line by just 1% in the current year.
One reason for its outperformance of the wider index could be stronger growth next year, with Safestyle expected to deliver an 8% rise in earnings. Similarly, continued low interest rates and a booming UK property market could also be factors in its recent share price success. However, with Safestyle now trading on a PEG ratio of 1.6, its shares appear to be rather fully valued. As such, it may be worth waiting for an improved outlook or lower share price, since it remains a relatively cyclical business.
