Tesco (TSCO): Growth slowing; but still best of the bunch
- Recovery reportedly slowing – but shares still up 20% from its Dec-18 lows
- Sector is mired in pessimism; peers likes SBRY and MRW are performing poorly
- Relative strength analysis suggests Tesco is one of the sector leaders
Warren Buffett famously got stung in Tesco. In 2015, the billionaire publicly admitted that Berkshire Hathaway, the US-based conglomerate that he controls, lost about $444 million after Tesco’s share prices dived from 380p to 160p. It was a big hole for the retailer to climb out of.
Four years later, Tesco share prices (yield: 2.55%; p/e: 16) are still trading 50% below its all-time highs attained in 2008. What is more worrying is that the retailer’s recovery is at risk. The UK market is recently described by the CEO as ‘subdue’ (June 12), while the group’s first-quarter like-for-like sales grew just 0.2%.
Unsurprisingly Tesco’s share price lost some upward momentum. Its tactical bull run peaked at 250p in late April; the stock has been testing sideways support at 220p. If this floor goes, the next support is 20p lower at 200p (see below).
However, Tesco’s performance should be viewed against the wider sector – which is very poor. Sainsbury (SBRY), for example, saw its share price collapse from 340p to 190p in a year, a drop of 44% (see below). Significant price gaps down; new multi-year lows; and share prices compressed beneath long-term trend indicators – all suggest investors are fleeing this stock.
A starkly similar trend is noted in Morrison (MRW), which hit investors with a 27% decline in share prices over the past year.
Thus, in terms of relative strength, the Tesco appears to be outperforming its peers. Over the medium term, this looks set to continue – although SBRY and MRW may stage brief counter-trend rallies because they are so oversold.
Overall, the carnage in the High Street remains a fundamental challenging point for all retailers big and small. So for Tesco to have rallied 20% in six months means that one should consider taking some profits and watch to buy them back later on.
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Jackson has over 10 years experience as a financial analyst. Previously a director of Stockcube Research as head of Investors Intelligence providing market timing advice and research to some of the world largest institutions and hedge funds.
Expertise: Global macroeconomic investment strategy, statistical backtesting, asset allocation, and cross-asset research.
Jackson has a PhD in Finance from Durham University.