Tesco (LSE:TSCO) shares recently saw a sharp spike followed by a subsequent decline. How is the stock looking now, as a potential investment to consider buying?
Note: return data correct as of time of recording.
Transcript:
CHRIS: Hi Fools, Chris Nials here and I’m joined by Motley Fool analyst Zaven Boyrazian. Morning Zaven!
ZAVEN: Hello!
CHRIS: We’re going to be talking about Tesco today, which was probably about as solid as a FTSE 100 share could get. But recent events have certainly shown that there are always surprises in store. Zaven, what’s been happening?
ZAVEN: Well Chris, I don’t think it’s unfair to say that Tesco has been something of a “steady Eddie” for many UK investors over the past year or so, with its share price gaining around 25% between the end of February 2024 and Mid-March 2025. But as experienced, long term investors, we should have known better to assume that its resurgence would continue uninterrupted!
CHRIS: Yes indeed it’s certainly been a rocky week or so to say the least. What’s been the driver of the slump?
ZAVEN: So this all started on the 14th of March and came from an unexpected source: its underpowered rival Asda. And 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. Some 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 was down a hefty 12.97%. This meant that someone who had invested £10,000 just before this would 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 12% over the past year and 79% over five years, if you reinvested dividends. And I think it certainly has the resilience to recover from this blip, though it may take time. Though past performance is not an indicator of future results.
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.
CHRIS: You mentioned a pretty heady stat there – a 79% return over the past 5 years if you’d reinvested the dividends, which would have certainly pushed its valuation up. Has this dip perhaps made it more attractive to investors who perhaps have been watching on the sidelines, looking for a good point to consider buying?
ZAVEN: Well, in my opinion at least, the shares now look decent value with a price-to-earnings ratio of 13.7. The dip has also nudged its current dividend yield to a slightly more appealing-looking 3.73%.
And analyst forecasts still suggest that Tesco could have a stellar year. In fact, the predictions of 13 brokers forecasting Tesco’s one-year share price produces a median target of 410p. If that’s correct, that’s a potential gain of around 23% from today’s price.
But there are two very important things to consider with that. First of all, forecasts are very slippery things. And secondly, most of them were probably made before the Asda bombshell and could certainly be revised down.
But for me, Tesco’s recent tumble is a reminder that even the quote unquote “Steady Eddie” stocks can face short-term turbulence. And 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 it to be plain sailing throughout. Investors must always expect short-term volatility and, in truth, that’s a good thing too. Because when shares dip, re-invested dividends could pick up more stock at the lower price.
CHRIS: Ok great – thanks so much for the insight Zaven. Any final thoughts before we sign off?
ZAVEN: We can’t ignore the threat of another pricing war. Like many retailers, Tesco operates with razor thin margins and downward pressure on pricing during a period of sticky inflation is a nasty combo.
However, it’s worth pointing out that this isn’t the first time a company has tried to take Tesco’s crown as industry leader. And with plenty of experience with competing against discount retailers like Aldi and Lidl, I think it would be a mistake to underestimate the retail giant.
CHRIS: Thanks so much again Zaven, and thanks so much to everyone watching. Fool on!
