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Ocado vs Tesco share price: which FTSE 100 stock is the better buy?

With big differences recently between the performance of the Ocado share price and the Tesco share price, Charlie Carman explores which stock he prefers. The...
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Tesco  (LSE: TSCO) and Ocado Group (LSE: OCDO) are two FTSE 100 supermarket stocks that have experienced different fortunes over the past couple of years. While the Tesco share price went into freefall in early 2021 during the coronavirus pandemic, the Ocado share price soared in tandem with rising consumer demand for online grocery shopping. However, things have changed recently. On a 52-week basis, the Tesco share price is up by 19% compared to a -45% drawdown for Ocado. 

Let’s examine which stock I believe offers better value at today’s prices.  

Tesco share price: a value proposition 

Tesco is the UK’s largest supermarket chain. It also runs operations in central Europe and Asia in addition to a retail banking division. With consistent demand for its groceries and a traditional bricks-and-mortar business approach, for me, Tesco stock is a defensive investment prospect. The company’s market cap is over £28.3bn and Tesco has historically offered shareholders reliable dividends and earnings growth.  

The Tesco share price stands at around 273p, slightly towards the upper end of its five-year trading range from a low of 210p in 2017 to a high of 337p in 2018. Tesco’s price-to-earnings ratio sits just above four, making it one of the cheapest FTSE 100 shares. Moreover, the stock’s current dividend yield of 3.28% is pretty close to that of the FTSE 100 index as a whole, at 3.56%.

As inflation rises, the Tesco share price could come under pressure. Rising food costs and supply chain disruptions could act as bearish headwinds. However, Britain’s largest supermarket looks better placed to cope with these threats than many direct competitors, such as Sainsbury’s and Marks & Spencer, due to strong customer loyalty.

Over 20m Brits own a Tesco Clubcard. Although Tesco operates in an intensely competitive market, the discounts Clubcard holders benefit from should mean the Tesco share price will resume its upward trajectory over the coming months in my view, despite the inflationary environment.

Ocado share price: a growth stock

In contrast to Tesco, Ocado is a more speculative stock for me. Ocado specialises in online grocery shopping, but it also resembles a tech stock in some ways. For instance, the company uses AI in its Ocado Smart Platform to offer efficiency improvements in its partners’ grocery e-commerce operations.

The Ocado share price typically experiences greater volatility than the Tesco share price. Furthermore, Ocado currently trades at a negative P/E ratio, does not distribute dividends, and has never turned a profit. This concerns me as Ocado has been trading for over two decades. 

Bulls can argue that Ocado is one of the most innovative companies in a sector dominated by more traditional business models, with its focus on software and warehouse robotics. If this really is the future of retail, Ocado shareholders should stand to benefit.

Nonetheless, Ocado posted a pre-tax loss of £177m for 2021. As consumers revert to their pre-pandemic in-store shopping habits, I’m struggling to be optimistic for Ocado’s share price.  

Which FTSE 100 stock is the better buy for me?

Right now, I’m looking to invest in quality stocks and de-risk my portfolio away from more speculative plays. Accordingly, for me, Tesco constitutes a good value stock to invest in for 2022. I view Tesco as a better buy for me than Ocado at present. 

The post Ocado vs Tesco share price: which FTSE 100 stock is the better buy? appeared first on The Motley Fool UK.

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More reading

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Here’s why I’d buy Tesco shares now!

Charlie Carman does not own shares in any of the companies mentioned. The Motley Fool UK has recommended Ocado Group, Sainsbury (J), 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.





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