Many exciting businesses are enjoying record demand for their products -- makers of technology products, online-oriented companies and airplane manufacturers come to mind. Exciting is nice, but performance is better -- especially if you are an investor.
Performance can be found in some of the most prosaic businesses around, such as supermarkets. Yes, the supermarket industry is punitively competitive, and distinguishing one supermarket company from another can be tough. But it is an essential industry where some supermarket operators stand out. Among them is British-based Tesco PLC (TSCDY.PK). One of the world's great investors thinks this is a company worth owning.
You may be unfamiliar with Tesco, yet it's worth knowing about. It's among the largest retailers in the world. Its trailing 12-month sales are about $96 billion, compared with Kroger's (KR) $89 billion. Kroger is the largest U.S. standalone supermarket company.
Tesco's beginnings date back to London in 1919. The company has come a long way since, with 5,380 stores worldwide, including 2,715 in the U.K., where it does about half its business (and holds 30% of the grocery market) and 164 stores in the U.S., where it is trying to break in with its Fresh & Easy chain. Its total employee count is about a half million.
Not all Americans are unfamiliar with Tesco. Investment maven Warren Buffett favors the company, and he's been a shareholder since 2006. He recently boosted his holdings in Tesco to 5% from 3%. Several of the guru strategies I use to pick stocks also like this retailer as well. My Peter Lynch-based strategy likes Tesco because its yield-adjusted PEG ratio (price-to-earnings relative to growth) is a desirable 0.66, based on the average of the three-, four- and five-year historical earnings per share growth rates (a PEG of 1.0 or less is acceptable).
A strategy I base on James P. O'Shaughnessy's writings is also very positive on Tesco. It likes the company's large market cap ($40 billion), cash flow per share that exceeds the market's mean cash flow per share, high number of shares outstanding and huge sales. Among the stocks that pass all these tests, the strategy then looks for the top 50 that have the highest dividend yield. Tesco, with a dividend yield of 4.58%, makes it over this final hurdle.
One other guru strategy is buying into Tesco, namely the one based on the strategy of John Neff. It looks for stocks that trade at a PE between 40% and 60% below the market's PE. The current market PE is 16, so the acceptable range is 6.40 to 9.60, and Tesco's is 8.95, placing it nicely within the acceptable range. For dividend payers, the strategy looks for earnings growth of between 7% and 20%, and Tesco's average for the three-, four- and five-year historical EPS rates is a solid 9%.
Tesco is a well-performing giant. Buffett likes it, as do three guru strategies, and the grocery shoppers of Britain and many other countries. Tesco provides the investor with a solid performer and a good way to gain international diversification in one's portfolio.
