Life is swings and roundabouts, and so is investing. What goes up all too often comes down, and if you are lucky, it works the other way round as well.
Supermarket giant Tesco (LSE: TSCO) and microchip manufacturer ARM Holdings (LSE: ARM) are two companies that have been surging in different directions forsometime. Over the last five years, Tesco is down a hellish 55%. Over the same period, ARM is up a heavenly 215%. To the novice investor ARM would clearly look the better prospect, it is hard to argue against momentum. Butlife is full of surprises, and maybe todays down-and-outer could be tomorrows up-and-comer (and vice versa).
Tesco keeps falling, down 20% in the last six months, after hopes thatnew boss Dave Lewis would chart acourse towardssmoother watersran aground. Drastic Davehas a far bigger job on his hands than he can have guessed when he signed up to salvage what is still the UKs number-one grocer. Hehas finally offloadedSouth Korean unit Homeplus, which was sold for 4.2bn, but that cash injection counts forlittle when market share keeps on plummeting.
It is hard to put too much faith in Tescos turnaround prospects with latest Kantar figures showing sales down1.1% in the 12 weeks to 11 October and share downto 28.1% from 28.8%. The fact that Tesco has been forced to slash prices like everybody else only makes matters worse. Near-zeroinflation and rising wages should be putting more money into shopperss pockets but grocery deflation has wiped out the benefit. Tescos forecast operating margins are now just 1.1%. Under former boss Philip Clarke it was targeting 5.2%.
If the onslaught from Aldi and Lidl wasnt bad enough, next year Tesco must contend with thefull-launch of Amazon Fresh, which Kantar claims could be a major disruptor, bringing down average basket sizes, accommodating on demand shopping, and accelerating the growth of the whole online market. At 19.42 times earnings Tesco isnt even cheap and there is no dividend either. Two years ago I swept all the supermarkets at my portfolio and I see little reason to return toTesco now.
Strong ARM Tactics
I was wise to sell Tesco then but daftto sell ARM Holdings just before it becamewhat would have been my first four-bagger. Despite posting encouraging fourth-quarter results in February the stock was caught up in the wider US tech market sell-off in March, one of those irrational bouts of selling that cool-headed long-term investors should welcome like desert rain. It hit a nadir of825p on Black Monday in August but has since confirmedits class, rebounding 28% to todays 1057p.
ARMs Q3 results showed a pretty fab37% year-on-year increase in processor royalty revenues, and 17% rise in overall revenues to $375.5m. Semiconductors is a competitive market but ARM not only has an edge, but seems to be sharpening it by the day. It recently claimed that its revenues will outpace the market by 15% in the medium term and the faster it grows, the more it can invest in R&D, and the harder it will be for competitors to catch up.
ARM still looks young and hungry, Tesco looks tired and bloated. That has been the story of recent years, and I cant see any reason for it to change now.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended ARM Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.