If I take the year-to-date performance of Tesco (LSE:TSCO) shares, I’d find that it’s actually down 2.2%. This is a bit surprising, considering the good news and solid results out recently. Over 12 months, shares are pretty much flat, but this doesn’t take into account the stock market crash from earlier in March 2020. Putting all of this together, I think Tesco shares look like a bargain to buy right now.
We’re in ISA season as well, with the deadline today. As such, because I’ve still got some of my allocation remaining, I’m thinking about buying Tesco shares and adding them to my Stocks and Shares ISA. This way, if I do see a large rally in the future and sell the stock, I can benefit from all the capital gains being free from tax.
Deciphering recent Tesco share moves
Firstly, I want to clarify something before discussing the main reasons why I think Tesco shares could be a good buy. When looking at the historical share price performance, the sudden slump in February could get me excited. However, this in itself doesn’t undervalue Tesco.
The move lower was in reaction to the paying out of a special dividend equating to 50.93p per share. This was paid due to Tesco receiving a large amount of money from divested operations abroad. In short, the payment of the dividend dropped the value of Tesco as a whole, as the cash goes out the door to shareholders. So this move lower (by around the same amount as the dividend) doesn’t reflect an undervaluation of Tesco shares.
Now that’s been cleared up, let’s get onto more tangible reasons for a potential ISA bargain. I was impressed with the recent Christmas and Q3 trading update. Like-for-like UK and ROI sales during this period were up 6.1%! This growth is much harder to come by given the saturated market and the existing size of Tesco.
As of the end of 2020, Tesco had the largest market share in the sector, with 27%. It therefore is more vulnerable to losing market share than smaller competitors. But the sales growth for the end of last year shows me that the business is certainly still growing and very much a customer favourite.
What’s the long-term outlook?
Full-year results are due out on 14 April, and in my opinion they should be strong based on the interim results. Although Tesco shares look undervalued to me right now, investors may start buying in after they see the overall results.
Going forward, I think the outlook remains rosy for Tesco. It’s a defensive stock, which means it’s fairly uncorrelated to downturns in the wider economy. So I don’t see a lingering or double-dip recession in the UK really hurting the company. In fact, I think that it could push Tesco shares higher as people sell out of risky stocks and look for a safer stock to put their money into.
The slim margins in the supermarket game is always a risk when looking to buy the stocks. However, Tesco has shown an ability to not only survive but also grow despite this, so I’d look to add it to my ISA today.
