Growth stocks have faced a torrid time in recent months. But this is no surprise. Indeed, inflation is at a 40-year high, reaching 7% in the US most recently. As already confirmed by the Fed, and implemented by the Bank of England, this will lead to higher interest rates, making it far more expensive to borrow. High inflation rates also lowers the value of future cash flows, which is where growth stocks obtain a large amount of value. One growth stock that has been particularly beaten down in recent months in Teladoc  (NYSE: TDOC). But the telehealth company is still performing excellently, and it now looks undervalued from my perspective.

Valuation perspective

Due to the extra demand that Covid brought, the Teladoc share price soared in 2020, and reached a peak of $295 in February 2021. But the past year, has not been pretty for the company, and the stock is now priced at just $80. This is around a 70% decline in a year. Further, Teladoc is now priced below its pre-Covid levels.

But this valuation seems entirely detached from the performance of the company. In fact, for full-year 2021, Teladoc expects revenues of over $2bn, over a 90% year-on-year rise. This gives the firm a price-to-sales ratio of under 7. Compare it to Zoom, another beaten-down growth stock, which has a price-to-sales ratio of over 12. Zoom is also seeing slower revenue growth than Teladoc, with a 35% year-on-year rise in the third quarter. Therefore, in comparison, Teladoc looks far too cheap from a revenue perspective. As such, a recovery in the Teladoc share price seems warranted. 

It does have to be mentioned that Teladoc is still loss-making though, and it’s not expected to make any profits for the foreseeable future. Significant losses have been caused by the acquisition of Livongo, which in hindsight, may have been overpriced. Indeed, at the time of the acquisition, Livongo was valued at around $18.5bn, while Teladoc is now only valued at around $13bn. But while this unprofitability increases the risk of the shares, I’m willing to overlook it due to the company’s growth in other areas.

Other reasons this growth stock could rise

Teladoc operates in the telehealth industry and has established itself as a global leader in this market. There are also signs that this industry is growing. In fact, McKinsey & Company projected that the virtual healthcare market will reach $250bn. This would certainly benefit Teladoc.

Fears that the company will see reduced demand post-Covid have also not come to pass so far. In fact, in the third quarter of this year, Teladoc still saw year-on-year revenue growth of 81%. This is despite coronavirus being an even more prominent concern in 2020. Such incredible growth demonstrates that the share price fall is not correlated to Teladoc’s performance. Instead, it seems solely due to the general sell-off of growth stocks. I believe that this sell-off has now been overdone. Teladoc, in particular, seems oversold.

Therefore, due to the excellent growth at the firm, and the fact that its price hasn’t been this low since 2019, I will continue to buy more Teladoc shares.

Stuart Blair owns shares of Teladoc Health. The Motley Fool UK has recommended Teladoc Health and Zoom Video Communications. 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.

Many people believe that penny stock investing involves picking small and obscure companies. The Lloyds Banking Group (LSE:LLOY) share price shows that this isn’t the case. This is a FTSE 100 stock, but at 53.4p per share, it  trades comfortably inside penny stock territory below £1.

History shows that penny stock investors can end up making big returns by identifying the growth heroes of tomorrow. But Lloyds isn’t a low-cost UK share I’m thinking of buying today. It has things in its favour like a trusted brand name, an improving digital banking operation and considerable exposure to Britain’s strong housing market.

However, as a long-term investor I worry about the prospect of prolonged economic weakness in Britain and the damage this could cause to cyclical shares like UK banks. I also think the Bank of England will keep interest rates well below historical norms, hitting profits at the likes of Lloyds even further.

Why I’m avoiding Lloyds today

It’s true that the Lloyds share price looks mighty cheap right now. The penny stock trades on a P/E ratio of just 8.6 times for 2022. It also boasts a meaty 4.8% dividend yield.

But why should I take a chance with Lloyds when there are many other dirt-cheap penny stocks for me to choose from today? Here are two such shares I’d much rather buy today.

7.1% dividend yields

Financial services giant Old Mutual (LSE: OMU) is a stock that shares some qualities with Prudential, a FTSE 100 equity I already own. Both companies have built strong brand recognition over many generations (Old Mutual was founded just three years before The Pru, in 1845). These two businesses have also put emerging markets at the centre of their growth strategies. Prudential is building around Asia while Old Mutual’s centred on fast-growing African economies.

You might not be surprised to hear that Old Mutual’s a UK share I’d also happily buy for 2022, then. The financial products market in South Africa and other sub-Saharan nations is massively underpenetrated. This leaves plenty of room for sales growth as booming wealth levels drive demand for savings, investment and protection products.

At 65.7p per share Old Mutual trades on a forward P/E ratio of just 8.5 times. The penny stock also carries a mighty 7.1% dividend yield. I’d buy the company even though intensifying competition is a threat I’d need to keep an eye on.

Another superior penny stock

I also think Triple Point Social Housing REIT’s a more attractive penny stock than Lloyds right now. I think it’s in better shape to deliver long-term profits growth as demand for specialist social housing rapidly grows. This UK share provides accommodation for individuals with special living requirements. And it continues to build its property portfolio to boost its growth opportunities. In late December it acquired five properties for its nationwide portfolio for a total cost of £9.4m.

Triple Point trades on a forward P/E ratio of 9 times at current prices of 96.4p. It boasts a huge 5.8% dividend yield too. I’d buy it even though a lack of viable acquisitions could hit its growth plans.

Royston Wild owns Prudential. The Motley Fool UK has recommended Lloyds Banking Group and Prudential. 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.

We asked our freelance writers to share the top dividend stocks they’d buy in January. Here’s what they chose:

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Rupert Hargreaves: Impact Healthcare REIT

Impact Healthcare REIT (LSE: IHR) focuses on buying healthcare properties in the UK. The properties are usually leased on long-term contracts with annual inflation uplifts. The firm has expanded its portfolio by around 150% over the past few years.

Thanks to this business model, Impact Healthcare has become an income champion. The stock currently yields 4.4%, and analysts expect the yield to hit 5.5% in 2022. I would buy the shares for my portfolio for these reasons.

Some challenges the firm may face include higher interest rates, which could reduce the amount of cash value for distribution to investors.

Rupert Hargreaves does not own shares in Impact Healthcare REIT.

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Zaven Boyrazian: Anglo Pacific Group

Anglo Pacific Group  (LSE:APF) is a royalties business that finances the development of mining sites of other companies. In exchange, it receives a portion of the materials extracted from the earth.

The firm has a stake in eight producing mines worldwide and another seven in early-stage development. Combined, they supply nine different metals, including cobalt and vanadium, which are key ingredients for electric vehicle batteries.

While the company is exposed to the risk of fluctuating commodity prices, it is currently yielding 6.5%. That’s why I think now is an excellent time to increase my position in this dividend stock!

Zaven Boyrazian owns shares in Anglo Pacific Group

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Paul Summers: Somero Enterprises

At the risk of sounding like a stuck record, my top dividend stock for January – and one of my picks for 2022 – is Somero Enterprises (LSE: SOM). Offering a near-6% dividend in FY22, this quality AIM-listed company is doing exceedingly well as the infrastructure boom in the US continues. Somero manufactures laser-guided equipment to check that concrete flooring in warehouses is completely flat. 

Clearly, recent momentum could be lost in the event of a serious wobble in the global economy. At a little less than 13 times forecast earnings, however, the valuation still looks reasonable to me for the income on offer.

Paul Summers owns shares in Somero Enterprises

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Ed Sheldon: Legal & General Group

My top British dividend stock for January is Legal & General Group (LSE: LGEN). It’s a financial services company that specialises in insurance, investment management, and retirement solutions.

Legal & General has put together a solid dividend growth track record over the last decade. For 2020, it paid out dividends of 17.6p per share, up from 13.4p for 2015. For 2021, the total dividend is expected to amount to 18.4p. At the current share price, that equates to a very attractive yield of 6%.

One risk to consider here is that share price volatility can be elevated at times. This can impact overall returns. I think the key is to forget about the volatility and focus on the big dividend payments, however.

Edward Sheldon owns shares in Legal & General Group.

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Royston Wild: ContourGlobal  

ContourGlobal (LSE: GLO) constructs, acquires and runs power stations all over the world. And at current prices it’s one of the highest-yielding shares on the FTSE 250. A reading of 7.6% for 2022 beats the index’s broader 2% average by a massive margin too. 

Concerns over central bank rate hikes and their impact on the global economy are significant. This has the potential to drive up debt costs at ContourGlobal. But unlike most UK shares, such monetary tightening shouldn’t stop this FTSE 250 business generating big profits, in my opinion. The critical nature of ContourGlobal’s services should see to that. So I think this is a top dividend stock for these uncertain times. 

Royston Wild does not own shares in ContourGlobal.

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G A Chester: Polymetal International 

Gold and silver miner Polymetal (LSE: POLY) has a high-quality portfolio of producing, development and exploration assets in Russia and Kazakhstan. It’s a FTSE 100 company, and a top-10 global gold producer and top-five global silver producer. 

Operational setbacks can be a risk with miners, but I think Polymetal’s nine producing mines mitigate the risk by reducing the adverse impact of a problem at any one. 

I’m expecting a fourth-quarter production report later this month to underpin an analyst’s consensus forecast that gives the dividend stock a P/E of around eight and a generous yield of near to 8%. 

G A Chester has no position in Polymetal International.

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Roland Head: Ibstock

FTSE 250 firm Ibstock (LST: IBST) is one of the UK’s largest manufacturers of bricks and concrete building products. The company’s products are used by housebuilders, in commercial buildings and on the railway network.

Ibstock’s business has recovered from the pandemic, but its share price remains nearly 40% lower than at the end of 2019. At this level, the shares offer an attractive forecast dividend yield of 4.2% for 2022.

The main risk I can see for this dividend stock is that a downturn in the construction market could hit demand. However, management say demand remains strong. Ibstock is on my shopping list.

Roland Head does not own shares in Ibstock.

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Christopher Ruane: Diversified Energy

Double-digit percentage yields are unusual, but one is offered by Diversified Energy (LSE: DEC).

The company owns over 60,000 oil and gas wells spread throughout the Appalachian region of the US. The sheer number of wells gives the dividend stock critical mass, even though many of them individually are fairly small. That enables it to generate substantial cash flows. The company pays dividends quarterly and currently yields over 10%. One risk, though, is the future cost of capping old wells. That could eat into profits.

Christopher Ruane owns shares in Diversified Energy.

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The Motley Fool UK has recommended Anglo Pacific, Ibstock, and Somero Enterprises, Inc. 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.

I’ve been investing for some time now, but if I was starting from scratch today with £5,000, how would I invest it?

Asking an investor this question is nearly guaranteed to give you hundreds, if not thousands of different answers. This is because every single person has a different set of influences in their lives, different levels of risk tolerance and different circles of competence. Given the current climate — worries about inflation, interest rates and potential market crashes — it can be even more daunting. But there are still lots of excellent companies that I’d be happy to invest in.

Managing investment risk

All investing comes with risks, even without considering the possible ones listed above. So, the first step I would take is to divide my funds to create a portfolio with high-risk, medium-risk and low-risk investments. These would not be equal portions, however. Higher-risk investments naturally have the possibility of generating the largest returns, but they also have the greatest chance of going to zero.

To this end, I would allocate just £1,000 to high risk, £2,000 to medium risk and £2,000 to low risk.

Low-risk stocks

For my low-risk portion of the portfolio, I would choose Lloyds Bank and Tesco. Both of these companies pay a small dividend (2.35% for Lloyds/3.31% for Tesco) and have some key fundamentals in their favour. Lloyds has great brand recognition and has been making cuts to its operation costs, while Tesco provides a vital service that will continue to generate revenue even in tough times. Neither is perfect and both saw their share price tumble in the March 2020 crash, but Tesco’s has recovered and possible interest-rate increases could make Lloyds even more profitable.

Medium risk

I’ve mentioned before how impressed I am with Wise’s performance over the pandemic years. Despite international lockdowns, the online payment service company has managed to quadruple its revenue and increase its customer base by a further four million people. Wise is a new company to the LSE, and the share price has had some growing pains. It fell from a high of 1,140p in September down to 606p at time of writing. With a price-to-earnings ratio of 5.35, this strikes me as a great time to add it to my portfolio. The company does have very small profit margins, however, which could come back to bite it if it’s unable to grow further. But such are the risks of investing.

High risk

Argo Blockchain is a tricky one. I personally think that cryptocurrencies like Bitcoin are here to stay and that companies like Argo, which ‘mine’ them, stand to benefit hugely over the long run. But it’s still early days yet in the sector, and there’s no way of knowing who will survive. Argo is profitable and has been increasing both revenue and profits since 2020. But its main source of income is from the Bitcoin it mines, and it’s a highly volatile asset.

Investing for the long term

The most important thing I have to keep in mind is that this is all in the service of the long term. The goal is to still be holding these shares in 20, 30 or even 40 years’ time. These shares could all crash tomorrow, but if I keep a hold of them, I believe they are almost bound to be worth more in the future.

The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of investment advice. Bitcoin and other cryptocurrencies are highly speculative and volatile assets, which carry several risks, including the total loss of any monies invested. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.

Key points

• Rolls-Royce shares are up over the past year, but still heavily down over two years.
• Risks include the struggling civil aerospace division due to Covid-19 and high debt levels.
• Potential upside could come from disposing of business areas or growing other divisions.

Over the past year, the Rolls-Royce (LSE:RR) share price has risen by 17.7%. This isn’t a bad return for an investor, but if I look further back over two years, the picture changes. Over this time horizon, Rolls-Royce shares are down 45%, taking into account the full impact of the pandemic. So even with the bump higher from 2021, is this a misleading return that could see me holding a poisoned chalice for 2022?

Reasons to stay away

In my opinion, the main reason why Rolls-Royce shares have been hit so hard over two years is due to the civil aerospace division. This is the area that houses the turbofan aircraft engines. Naturally, this division is most profitable when the engines are being heavily used. This contributes to more servicing requirements, and new engine installations. 

Unfortunately, the pandemic has meant that most airline operators have struggled. Lower flying hours have reduced demand for the services and products from Rolls-Royce. 

Looking forward, will flying hours get back to 100% of pre-pandemic levels? I think so, but not anytime soon. Even with some pent-up demand, I think a lot of people will still be cautious about travelling internationally, either for business or pleasure. This is the big concern that could mean that Rolls-Royce shares could stagnate this year. In short, even though the stock looks cheap, it might struggle to find any positive catalyst to break higher.

A second reason worth noting is the net debt figures. As of the half-year report for 2021, net debt stood at £3.1bn, up from £1.5bn at the end of 2020. This is a sizeable liability that the company will have to deal with for years to come. Even though it’s needed, it’ll likely take a long time to reduce this, during which it has to pay interest on the debt. 

Upside potential for Rolls-Royce shares

On other other hand, the stock might offer high returns. For example, consider the high debt figure. The business has made it clear that by disposing of business divisions and cutting other costs, it’s aiming to boost liquidity and cash flow. This has already been seen, with the sale of ITP Aero to a private equity business for over £1bn late last year.

Another reason for optimism for Rolls-Royce shares comes from the diversified nature of operations. Civil aerospace might take a long time to recover. But this isn’t the only line of business for the group. It has a large defence division, as well as power systems, electrical and other areas. With this spread of options, the company could grow in these spaces and offset the drag from civil aerospace.

I personally think that it’s too early in 2022 to make a call on the key issue of civil aerospace performance due to Covid-19. Therefore, I’m going to wait for the moment before considering whether to buy. 

Jon Smith and The Motley Fool UK have no position in any of the shares mentioned. 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.

Cinemas around the world were closed for long periods along with restaurants and bars to stop the spread of the Covid-19 pandemic. During this time, the Cineworld (LSE: CINE) share price effectively collapsed. It fell from 190p to 37p in March 2020. With operations in 10 different countries, Cineworld’s ticket sales were zero for large chunks of 2020 and 2021. The main question to consider is, should I avoid this stock or buy more at these low levels?

Litigation

It is first crucial to mention the recent judgement by the Ontario Superior Court of Justice. This ordered Cineworld to pay nearly $1bn in damages to Cineplex after the former scrapped an acquisition deal. Although Cineworld is appealing the result, the judgement had a catastrophic impact on the shares. When the result was released to the market, the Cineworld share price plummeted 40% to close at 27.5p. There is also the possibility that there might be a dual listing in the United States through its Regal business. Nonetheless, I do view this judgement very seriously and will be watching the price action very closely. While the Cineworld share price did plummet, recent buying gives me some hope; since the fall, the shares have climbed around 38% to 38p.     

Encouraging recent results

A recent trading update, from the middle of November 2021, indicated that Cineworld box office revenue for October 2021 was 90% of 2019 levels. In the UK specifically, revenue was 127% compared with the same period in 2019. This came from the release of some delayed films, like James Bond’s “No Time To Die”, which boosted box office revenue. There are many more big films in the pipeline, and this gives me hope of further positive trading updates. While this does not necessarily outweigh the dark cloud of the litigation, it does at least show that Cineworld is functioning reasonably well on a daily basis.

On the other hand, the company has a big debt pile of around $4.6bn that may only get larger with the recent litigation case. Furthermore, revenue has continued to slide over the past two years. For the six months up to 30 June 2021, revenue was $292.8m. For the same period in 2020, this figure was significantly higher at $712.4m. As with many other reopening trades, progress could be halted if governments decide to lock society down again. This is possible if new variants arise. Overall, I think the lockdown risk is small and I am confident cinemas will stay open. Indeed, the UK Government recently decided not to include cinemas in the Covid Pass policy, meaning footfall remained steady.

In conclusion, there has been some alarming news about Cineworld stock in recent weeks. I will be waiting to see how these events impact the share price in the future, and maintain appropriate risk management procedures with this stock.  

Andrew Woods owns shares in Cineworld. The Motley Fool UK has no position in any of the shares mentioned. 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.

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With a share price just north of 200p, sportswear retailer JD Sports Fashion (LSE: JD) is among the 10 lowest priced FTSE 100 index constituents today. And its share price has fallen further in the past couple of sessions. I have to admit I am a bit taken aback by that fact. Its fall comes despite the FTSE 100 index remaining strong — the Footsie actually closed above 7,500  earlier this week after a really long period below that level. I am also surprised because JD Sports Fashion’s own trading update also released during the week was pretty decent. 

Positive update

Below are some of its highlights:

#1. For the 22 weeks up to 1 January 2022, the company’s performance was ahead by 10% compared to the same time last year. 

#2.  It expects profit before tax for the full-year ending 29 January 2022 to be “at least” £875m. Let me put this in perspective. This is 8% higher than the current market expectations of £810m. It is even higher than the full-year expectations laid out in its interim results by around 17%. At the time, the company had expected pre-tax profits of at least £750m.

#3. For the fiscal 2023, it expects that pre-tax profits will be in line with its profits this year, which is also ahead of market expectations. 

Why is the FTSE 100 stock down?

So why is the stock down? I think it is possible that investors were let down by the expectations for next year. Also, in relation to this year’s results, the company mentioned that the fiscal stimulus in the US might have contributed as much at £100m to the expected profits. If this is indeed the case, then its pre-tax profits without this support would have been closer to the initial estimate of £750m. Also, this reduces the possibility that it could revise its profit expectations for 2023 upwards. The stimulus was a one-off event during the pandemic, after all.

And in terms of valuations, it is still somewhat steep. At 26 times, its P/E ratio is already higher than that for the FTSE 100 index as a whole at 18 times. To be fair, JD Sports Fashion has proven itself to be a far superior performer than many other constituent stocks, so to that extent, a higher P/E could be justified. At the same time, it would be able to sustain its valuation only if it continues to perform. 

What I’d do

I have little reason to believe it might not be able to do perform over the medium-to-long term. Economic recovery would hopefully continue to drive consumer spending in the foreseeable future. And the company has also made a slew of acquisitions recently that could impact its numbers positively over time. Further, the athleisure market is a growing one, which could continue to drive the stock forward. I bought it a while ago, and increased my holdings recently. If I had not, I would do so now and hold it for a long time. 

Manika Premsingh owns JD Sports Fashion. The Motley Fool UK has no position in any of the shares mentioned. 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.

Recovery stocks have come a long way since the pandemic started almost two years ago. But some of them have far more ground to cover before they can get back to the highs they last saw in early 2020. A case in point is the FTSE 100 hospitality stock Whitbread (LSE: WTB), which is still trading some 35% below these levels. 

This might just be the opportunity for me to buy the stock, while it is still cheap. 2022 could be a better year for travel than last year was, which in turn could support companies like Whitbread. As a result, its share price could start inching up. In fact, I am surprised it has not done so already. On the contrary, its share price was down by almost 2% at yesterday’s close after it released its trading statement yesterday.

Positive trading statement for Whitbread

To my mind, though, there are plenty of positives in the company’s trading statement. In the third quarter of its current financial year (FY22), ending 25 November 2021, the company reports “Continued market outperformance”. Further, it points out that its budget hotels segment of Premier Inn reported sales growth of 10.6% from the same time in FY20, which is the comparable period from before the pandemic. Total sales in the UK were up 3.1% for the company and it is also cashflow positive.

It also sounds positive about the next financial year, which is expected to have less Covid-19 related restrictions. Specifically, it sees Premier Inn’s revenues returning to pre-pandemic levels. It does not say anything about turning profitable, though. If that happened, I reckon its share price could rise fast from current levels. Analysts are positive, though. As per a Financial Times compilation, on average they expect Whitbread to report a small profit in FY23, though these levels are expected to still be below the pre-pandemic numbers.

Risks to the FTSE 100 stock

I think this bodes well for the FTSE 100 stock in 2022. But there are risks too. The biggest one of course is the lingering pandemic. We really do not know what happens next, even though we could hope for the best based on the progress made so far. Another fast rising risk is inflation, which is also mentioned in the company’s latest update. It expects its sector inflation rate to range between 7% and 8% in 2022, which it says could impact its cost base. In particular, rising prices could impact its ability to clock profits. 

What I’d do

Based on my assessment of the risks surrounding the stock, I would wait and watch for developing trends on Covid-19, inflation, and its own performance. Its next full-year result in particular, could throw light on where the company is truly at and get a sense of where it is headed. There are still a few more months to go before those numbers come in. I will make a call then. Until then, it is on my investing watchlist.  

Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Supermarket giant Tesco (LSE:TSCO) has upgraded its expected annual earnings after strong sales across the Christmas period. The group saw strong sales over the six-week period to 8 January and total sales over the festive period this year grew 3.2% compared to 2020 and 8.8% compared to 2019. As a result, the board expects profits for the financial year to finish slightly above the upper limit of the previous guidance of £2.5bn to £2.6bn. How do I expect this to affect the Tesco share price and should I invest in the grocer today? Let’s explore. 

Tesco share price positives

Tesco had a very eventful 2021. Its board made the move to focus on the more lucrative European markets which allowed the company to shed its Asian operations in 2021. This allowed a £5bn special dividend payment and £1.7bn debt reduction last year. The company registered its highest market share in the UK in four years. And this allowed the grocer to ride the economic recovery in 2021. In the first half of 2021, Tesco recorded total sales worth £30.4bn and an operating profit of £1.3bn.  

Tesco CEO Ken Murphy addressed concerns in the third quarter (Q3) 2021-22 trading update. “Despite growing cost pressures and supply chain challenges in the industry, we continued to invest to protect availability, doubled down on our commitment to deliver great value and offered our strongest ever festive range”, he said. “As a result, we outperformed the market, growing market share and strengthening our value position”. 

Also, Tesco’s new Clubcard rewards means customers can access discounts. Its app has amassed 8.5m Clubcard users and 90% of promotional sales are at discounted prices. And the Tesco Whoosh superfast home delivery program has increased online retail considerably.

But does this make Tesco the biggest FTSE 100 bargain right now? I do not think so. Analysts expect rising inflation rates and raw material costs to eat into grocer profits next year as well. And Tesco’s performance depends on how well it navigates rising competition from discount retailers. 

Treacherous 2022?

Inflation is a growing concern in the UK. As we slowly recover from the effects of a two-year lockdown, rising commodity prices are affecting most sectors. For supermarkets, rising labour, transport, fuel, and raw material costs are eating into already razor-thin margins.

Rising costs eventually trickle down to consumers, who are already looking at discount retailers like Aldi and Lidl. Both saw a jump in market share in 2021 which is expected to grow next year as well. Another challenge for Tesco is the rise of Ocado‘s automated warehousing and robotic efficiency with grocery deliveries. 

The Tesco share price, at 288p, is trading at a forward price-to-earnings ratio of just 3.3 times. Its dividend yield of 3.17% is covered well by earnings, which is also a positive. The Tesco share price looks cheap on paper, but I think I will wait for its price to drop further before I invest. This is because there are lot of variables that Tesco has to navigate right now. The competition from discounters and rising food costs could impact sales considerably in the coming quarter. The stock is definitely on my watchlist but given the uncertainty surrounding the Omicron variant I am waiting to see how 2022 plays out before considering an investment. 

Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.