Despite consumers being forced to spend less, Tesco is bucking the trend and their shares are up over 70% since the beginning of the year. In this analysis, I take a look at why Tesco shares have been going up and if they are a good buy for your portfolio.
Tesco is a consumer staples stocks
The past two years were unusually turbulent in the global financial market.
In 2022/3, we saw the end of the decade-long zero-interest rate policy (ZIRP), the end of the covid pandemic created a period of pent-up spending and travelling, and the start of the Ukraine war that sparked a sharp rise in inflation rates across the world (due to elevated energy costs, for example).
Throwing in the wholesale collapse of the speculative bubble in crypto, “stonks” and Meme stocks. Investors lost trillions in paper wealth.
Taken together, it means that market participants find the financial-economic crosscurrents frightening. Protecting wealth now is more important than making them.
Ergo, investors prefer ‘safer assets’ like gold or defensive stocks – of which Consumer Staples is one such sector. Consumer Staples is a broad term used to include businesses that sell household goods, food and beverages.
The advantage of Consumer Staples businesses is that their products are in demand year in, year out. They are less cyclical and therefore offer a more stable earnings stream.
According to Fidelity, the American fund management powerhouse, their research found that US consumer staples companies tend to outperform the market when an economic recession (see below). You can also look at the MSCI Consumer Staple Index here.
Source: Fidelity Investments
But what has the above discussion do with Tesco?
For one, Tesco, as a supermarket giant worth £19 billion, is a typical consumer defensive stock.
Its businesses tend to operate well during an economic slowdown – and still churn out massive profits during the lean years. We can’t say that for a lot of other companies. For many, grocery shopping is a necessity.
Second, Tesco’s stock benefits from the general sector rotation into defensive sectors during a recession. To be sure, we are not saying Tesco’s stock price will not drop. Just that its share price may drop less than others (relative outperformance).
During Oct’22 to May’23, Tesco’s share surged by nearly 40 percent. That was an excellent recovery. Throughout this summer the stock was rangebound between 250-270p. That was before it staged a modest rally in the third quarter.
In early October, the company released its half-year results. Headline revenue increased by 5%. More impressively, Tesco’s pre-tax profits rose by more than 200% to £1.2 billion. That was significantly better than the market expectations and Tesco share promptly rallied by 8% in the days that followed.
Right now, we are modestly cautious because of the strong overhead resistance at 280-300p. Thrice the stock probed this area and failed to break through. Perhaps Tesco needs to regroup again before re-testing the ceiling.
For long-term investors, Tesco is an attractive stock because it remains highly profitable amidst a turbulent economy.