Tesco shares lost 24% last year. Should I buy in January?

Go to a Tesco (LSE: TSCO) shop over the past few weeks has barely given me a sense of a business that is performing very well. The supermarket giant continues to hold a commanding position in its market. But last year, Tesco shares lost 24% of their value.

Given my expectation that grocery sales will remain strong and Tesco has some key advantages in this market, could the stock be a buy for my portfolio?

Price and value

Just because a stock is lower than before doesn’t mean it’s a good value.

However, I think Tesco is looking very good at the moment. Currently, the company’s market capitalization is just under £17bn. Last year, it reported a post-tax profit of £1.5bn. That means a price-to-earnings ratio of around 11. That looks like good value to me.

2023 prospects

But that price is based on last year’s earnings. What if business is worse this year and next?

At the level of sales, although this risk I see is quite small. Demand for daily necessities sold in supermarkets tends to hold up even when the economy weakens. Today’s high inflation rate means that sales profits will grow even if volumes are flat or slightly down.

My concern is more about income than income. Inflation increases costs for Tesco, but as shoppers tighten their belts, it may be difficult to pass on all these additional costs in the form of price increases. Meanwhile, increased competition from competitors like Aldi and B&M can continue to squeeze the profit margin for the company.

This seems to be the result of the first half of the current financial year. While revenue (excluding VAT) increased by 6.7% compared to the same period last year, profit before tax decreased by 64%.

Reasons to own stocks

Despite my concerns about some of the short-term risks, in the long-term I continue to think there is an attractive investment case here.

Tesco is the UK’s largest supermarket operator. That gives you economies of scale and means you have a large customer base that can help generate profits in the future. The brand has broad recognition and the company’s new focus on its core business after reducing its international exposure could help sharpen management’s focus.

Digital retail has grown in importance, but it has also had the power to help build market share over the past several years.

Interim dividend increased by 20%. If I buy stocks for my portfolio today, the expected return will be more than 5%. I find it attractive.

My movement

Given the strong business attributes, good results and what I see as attractive valuations, I would consider buying Tesco shares now if I had the money to invest.