Over the past 12 months, the Tesco (LSE: TSCO) share price has generated a healthy 28% return for investors, significantly higher than the FTSE All-Share Index, which has risen 10% over the same period.
However, over the past five days, the share price has struggled, falling over 4%. What’s more, year-to-date the shares have fallen 2%. Does this mark the perfect opportunity to grab some cheap shares for my portfolio? Let’s take a close look.
Solid fundamentals
Inflation is wreaking havoc with markets, increasing volatility and creating uncertainty for investors. Whilst Tesco is not completely immune to this threat, it may be in a better position than some of its other FTSE 100 counterparts. Firstly, the retail grocery sector is highly defensive. Due to the consistent demand for Tesco products, the stock tends to provide stable dividends and earnings regardless of wider market moves. Secondly, Tesco has the market power to negotiate prices with suppliers, keeping them low, which could help draw in customers.
Considering the Tesco share price valuation, I also see positives. Trading at a mere 3.4 price-to-earnings (P/E) ratio, the stock seems to offer great value. For context, competitors Sainsbury’s and Marks and Spencer trade at P/E ratios of 11.9 and 9.5 respectively. In addition to its low valuation, Tesco also offers a healthy 3.1% dividend, which is very attractive to me.
A final point that excites me about the business is its newest venture, Tesco Whoosh. It’s a superfast delivery service, currently operating out of 115 stores. This number is expected to rise to 600 by the end of 2022 and offer over 1,700 products for customers. In my opinion, this is a great move from the grocery giant, as it allows Tesco to compete with smaller, fast delivery companies such as Gorillas and Getir.
Tesco share price risks
However, the supermarket landscape is a highly competitive and low-margin one. This means that the top producers are always competing on price. Complications from both Brexit and the pandemic led to severe supply chain issues across the industry. As a result, Tesco was forced to raise wages, which put further pressure on margins.
In addition to this, if inflation continues to trickle into Tesco product prices, consumers may begin to turn to cheaper alternatives such as Lidl and Aldi. This could impact revenues and would likely lead to a drop in the share price.
Should I buy?
All things considered, I like the look of the current Tesco share price for my portfolio. Although inflation creates the risk of rising prices, I think the defensive nature of the sector, coupled with Tesco’s industry clout, is enough to outweigh this risk. What’s more, with the share price falling over the past five days, I think now could be an opportunity for me to grab some discounted shares. Overall, at such a low valuation, I feel Tesco could prove a solid long-term investment for my portfolio.
