Tesco (LSE) is a stock that tends to divide opinion. On one hand, you have investors who believe that the company has turned itself around and that now is a good time to buy the shares. On the other hand, there are those who believe that the FTSE 100 company is likely to continue facing challenges in the years ahead and that buying Tesco shares right now is a risky move.
Personally, I’m in the latter camp. When I look at the investment case for Tesco, I see risks that are hard to ignore.
Losing market share
The main risk with Tesco, in my view, is that it’s continuing to lose market share at a rapid rate to the German discount supermarkets Aldi and Lidl.
Just look at the latest supermarket data from research firm Kantar. According to Kantar, over the 12-week period to 3 November, Tesco’s market share was 27%, down from 27.4% for the 12-week period to 9 September, and well below the 30% market share the group registered just a few years ago.
Kantar’s data also showed that over the 12-week period to 3 November, sales at Tesco decreased 0.6%, while sales at Aldi and Lidl increased 6.7% and 8.8%.
Make no mistake, these figures are worrying. Clearly, Tesco’s ‘economic moat’ (one of the first things that Warren Buffett looks for in a company) has been breached as competitors are stealing market share.
Tesco shares aren’t overly expensive right now (the forward-looking P/E is 13.6), however, all things considered, I think there are much better stocks to buy.
One FTSE 100 stock I do like the look of right now is technology company Sage (LSE: SGE), which provides cloud-based accounting and payroll solutions to small- and medium-sized companies, as well as the self-employed. This is a stock that is owned by both Terry Smith and Nick Train – two of the UK’s top portfolio managers.
There are a number of things I like about Sage. Firstly, the company appears to have attractive growth prospects. According to Orbis Research, the global cloud accounting market is set to grow at a compound annual growth rate (CAGR) of 8.6% between now and 2024. This market growth should provide tailwinds for the company.
Secondly, the nature of its business provides a competitive advantage. Once companies sign up for an accounting or payroll solution, they’re likely to stay with the same provider for a while. This means that recurring revenues are high, which is a big plus.
Finally, Sage is also very much a high-quality Warren Buffett-type stock. It’s highly profitable, it has a solid balance sheet, and it also has a great track record of generating shareholder wealth.
Sage shares currently trade on a forward P/E of 23.3, which means they are more expensive than Tesco shares. However, I wouldn’t let that valuation put you off. As Buffett says: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
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Edward Sheldon owns shares in Sage. The Motley Fool UK has recommended Sage Group and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019