This week’s UK Index winner is Tesco (+14%) which defied UK high street gloom to some extent, dragging peers Sainsbury (+4%) and Morrison (+3%) up with it. To be fair, several retail names fared quite well this week after trading updates and/or results, including Dunelm (performing well in tough UK market, online strong), Card Factory (faster sales, special div), Greene King (strong Easter after poor weather) and Mothercare (reassuring, strong online), but there were also a handful of disappointments, this time from the from the likes of ASOS (lower growth), Carpetright (restructuring) and WH Smith (digested badly).

Tesco shares jumped on strong FY results (positive sales, profits sharply higher, solid cash flow, even lower debt) and declared its first year-end dividend (2p) in four years. The latter signalled turnaround confidence and resumption of proper shareholder returns after an accounting scandal induced absence for several years.

The 2018 yield (3p) may still be small at just 1.5%, which pales in comparison to the 4% it paid 2012-14, and the 7-8% on offer from certain Housebuilders, however, consensus expectations have already increased TSCO’s yield to 2.3% for 2019, and there is potential for this to climb further. Broker have also upgraded estimates, targets and ratings, which has helped keep the shares bid this week.

All this has understandably boosted interest in Tesco shares, both from those looking for capital gains (recovery potential) and income seekers alike. Higher full year profits also shows progress towards the company’s mid-term margin targets which should help it maintain its #1 UK grocer position, fighting off the competition from highly successful and fast-growing German discounters Aldi and Lidl. The recent acquisition and integration of Booker may also help derive additional growth from wholesale rather than relying on consumer grocery.

From a technical standpoint, the shares have broken above 217.5p January highs to revisit the ceiling of the shares 9-month rising channel. In fact the shares have rallied 18.5% from their recent 200p lows (+2% on Tues pre-results, +7% on yesterday’s results day, +3% today), to trade their best in 3 years. Which begs the question: too far too quickly? The shares may well remain in a long-term uptrend, but it may also be that we are seeing the first hints of profit taking (more next week?), at the channel ceiling, and a move back towards the 217.5p breakout.

Could Tesco thus offer investors three trades for the price of one; 1) Profit taking after the recent strong rally, 2) a short trade back towards likely support at 215p and, lastly, 3) a buy opportunity if and when the rising channel resumes.

All eyes on next week to see how the shares fare, and where current momentum keeps the bulls buying rising, or whether profit-taking/bearishness results in a short-term pull-back (trading) within the long-term uptrend (investing)

Mike van Dulken, Head of Research, 13 Apr 2018