I have a confession to make about Tesco (LSE: TSCO) shares. On 28 February, I called the grocery giant the ultimate ‘Steady Eddie’ FTSE 100 stock.
I complacently wrote: “I don’t hold Tesco, but wish I did. Watching its steady, solid progress is like being given a cosy back rub after a stressful day.”
Oh dear. That hasn’t aged well. Less than a month later, watching the Tesco share price is more like being jabbed with a sharp stick. As an experienced long-term investor, I should have known better than to assume Tesco’s resurgence would continue uninterrupted.
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Can this FTSE 100 star shine again?
The pain was delivered on 14 March, and from an unexpected source: underpowered rival Asda. Despite Asda being the UK’s third-largest grocer with just a 12.6% market share, it’s suddenly spooked the entire sector. Tesco, by comparison, leads with 28.3%, but that hasn’t stopped its share price taking a hit.
Asda’s looking to revive its fortunes by slashing prices, even at the expense of denting short-term profitability. Investors now fear another supermarket price war, which could hit margins across the sector.
Tesco shares slumped 6% on the day, as did Sainsbury’s. One week later, Tesco’s down a hefty 12.97%. Someone who had invested £10,000 just before this would now be sitting on £8,703, a painful paper loss of £1,297.
Nobody likes to see a sudden drop in their portfolio. But the shares are still up 13.5% over the past year and 48% over five years, with dividends on top. The retailer has the resilience to recover, though it may take time.
The wider economic climate remains tough though. Inflation’s proving sticky, consumers are feeling the pinch, and economic growth is slowing. Tesco will need all its strengths, such as scale, brand loyalty and operational efficiency, to weather the latest storm.
This stock now looks better value
The shares now look decent value with a price-to-earnings ratio of 13.7. The recent dip has also nudged its dividend yield to a slightly more appealing 3.73%.
Analyst forecasts still suggest a stellar year. The 13 brokers forecasting Tesco’s one-year share price produce a median target of 410p. If correct, that’s a potential gain of around 27% from today’s price. Add in the dividend yield, and the total return could exceed 30%.
I have several things to say about that. First, forecasts are slippery things. Second, most of these were probably made before the Asda bombshell and could be revised down.
Tesco’s recent tumble is a reminder that even Steady Eddie stocks can face short-term turbulence. While I don’t expect a quick rebound, I still believe this dip presents an opportunity for long-term investors looking for a strong, market-leading company at a better price to consider.
Just don’t expect a nice cosy back rub. Investors must always expect short-term volatility and, in truth, that’s a good thing too.
When shares dip, re-invested dividends will pick up more stock at the lower price. Plus dips also throw up potential buying opportunities for far-sighted investors. LIke Tesco, today.
