When markets are highly volatile – as they have been lately – some investors start looking for a safe haven. Some turn to an industry with resilient long-term customer demand and start eyeing shares like National Grid or Tesco (LSE: TSCO). I own neither share in my portfolio although like many investors the idea of a safe haven appeals to me.
So why do I have no plans to add Tesco shares to my portfolio?
There’s no guaranteed stock market safe haven
The key point to understand is that no share is guaranteed to be a safe haven. Some shares show less volatility than others – but that is not always predictable ahead of time.
Take Tesco shares as an example. Before even getting into the details of its business, the share price chart alone can teach us some things.
Over the past year alone, Tesco’s highest share price (close to £4) was well above its lowest (£2.78). The high point was in February. If an investor had bought then, by the worst moment last month (that is, just one month after the purchase), the value of their holding would be down by almost a fifth.
Businesses change over time
But the share price is just a reflection of what the market thinks a company is worth. So might Tesco have a stable long-term value? I do not think so. Any business’s valuation can change over time.
Yes, demand for groceries is resilient. But that in turn has brought increased competition into the UK supermarket sector in recent decades, pushing down profit margins even for an industry leader like Tesco.
The company has evolved over time, pulling out of markets such as the US and Asia. Not only that, but even a successful company can run into difficulties an investor would be hard pushed to foresee.
Back in 2014, for example, it was embroiled in an accounting scandal. That is water now long under the bridge but it underlines why seeing a single share as a safe haven can be dangerous. Diversification is a key risk-management tool for any investor.
Using the stock market to make money
If I wanted a safe haven for my money I would likely stick it in a bank. The stock market inherently involves some risk, — but it can sometimes also offer potential rewards far above the interest I earn from a bank account.
Tesco has a leading position in a market I expect to benefit from long-term demand. It has a strong brand, industry-leading customer loyalty programme, proven business model and huge customer base.
At the right price, I would be happy enough to buy some Tesco shares for my ISA.
Currently though, Tesco trades on a price-to-earnings ratio of 18. Yes, the Tesco share price has come down notably since February, but that valuation still does not strike me as a bargain.
Tesco faces intense competition. Profit margins in grocery retailing are tight and current trade disputes could add more costs onto supermarkets like Tesco, that it may not be able to fully pass onto customers. That is on top of additional costs from changes to National Insurance contributions that kicked in this week.
At the current price then, I will be leaving this share on the shelf rather than adding it to my stock market shopping basket.
This post was originally published on Motley Fool
