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I was right about the Tesco share price! Here’s what I would do now

In June 2021, I wrote an article claiming that the Tesco (LSE: TSCO) the stock price was significantly undervalued. In the end, I was right on the money (literally in this case).

Over the past 12 months, the stock has produced a total return to investors of 16.6%. It slightly outperformed the FTSE All-Share Index, which returned 16.4% over the same period.

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Over the past three years, the company’s performance has been even more impressive. The stock has produced a total return of 11% per year. This is more than double the FTSE All-Share return over the same period.

I think the performance of the Tesco share price over the past three years illustrates the defensive qualities of the business. As other companies battled the pandemic, the company capitalized on its strengths.

And while past performance should never be used as a guide to future potential, I believe these strengths will continue to work in the company’s favor as the economic outlook becomes more uncertain.

Uncertain economic outlook

The outlook for the global economy is becoming more uncertain every day. The supply chain crisis and geopolitical tensions are just two risk factors companies like Tesco face.

At the same time, global inflationary pressures are driving up the cost of goods and services, especially commodity prices. Rising prices compress business profit margins because most businesses can only pass on a small percentage of these price increases to consumers.

Tesco is not immune to these challenges. Still, it has room to navigate some of those headwinds. It is large enough to negotiate special agreements with suppliers to keep prices low for customers.

It also has great financial flexibility to absorb the costs. The group recently announced it would reduce store opening hours and remove fresh fish and meat counters in most department stores to cut costs.

The company is also investing significantly in other efficiency initiatives, such as its rail freight operation. The overall goal of these efforts is to offset inflationary pressures and overcome global supply chain issues.

Tesco’s banking arm is also a valuable source of diversification and additional profitability for the group.

Tesco share price potential

Despite the general economic uncertainty, analysts estimate that the company’s net income will increase slightly over the next two years. I think these projections illustrate the defensive nature of the organization in a difficult environment. Earnings per share are expected to reach 22.1p in its 2023 financial year, compared to 16.4p for 2019 according to the city’s current projections.

Based on these estimates, the Tesco share price is currently on a forward price/earnings (P/E) multiple of 13.4. It also supports a dividend yield of 3.7%. While that valuation doesn’t seem particularly cheap, given the company’s competitive advantages, I think the stock looks like an attractive investment at current levels.

As such, I would continue to buy the investment for my portfolio today. I think the company could be an excellent haven for my portfolio during uncertain times.

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Rupert Hargreaves has no position in any of the stocks mentioned. The Motley Fool UK recommended Tesco. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we give in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of information makes us better investors.