Momentum

The trend has very much been one of sales continuing to decline each quarter. It’s of slightly more concern to some investors because they continue to hear a constant wave of news about how Aldi and Lidl are eating in the discount groceries sector. They have a very small share of the total UK food retail space, but that’s a matter for a different article.

Instead, our focus is on things required to change those bears in to bulls. A reduction in sales that came in ahead of consensus would be a significant moment for everyone. It will cause analysts to stop reconsider their assumptions in their models, and you could probably expect a re-rating of the stock.

Peter Lynch is famous for reminding investors that opportunities for research are all around them, and if you’re anything like me then you’ll have spotted a wave of discounted groceries — that are staple food items — outside your nearest Tesco store. I’ve also noticed TV adverts that are short and sharp: these are the foods, this is how cheap they are, shop at Tesco.

These are making people pay attention, we just have to weigh the chances of these actions feeding through to the results. Discounting hurts margins, but Tesco has famously high margins so they have pretty deep pockets to take a haircut. Is the marketing going to get more people through the doors?

Overseas

Tesco has overseas operations, some of which are more successful than others. They bowed out from a failed Fresh & Easy venture, but when the news was announced the share price reacted positively. It was a loss-making venture and when management took decisive action then the markets rewarded the behavior.

Their European operations are about 15% of total sales, and I believe that, as the Eurozone recovery continues, Tesco is in a good position to benefit from economic prosperity. India, Europe and Thailand are all good markets to be involved with in the long term, but they could use these overseas assets very strategically to send a message to The City:

“No more overseas investment until the UK market has been sorted.”

This would send a powerful message to analysts that they are committed to their home market and intent on sticking to their core competencies. Would they make such a statement?

Management

When Steve Ballmer announced his retirement from Microsoft, the stock jumped 8%. Investors thought the company was 8% more valuable without him. There has been a cry for Philip Clarke to step down, and after the recent announcement Tesco stock rose over 2% on the news. Being replaced by an outsider — Dave Lewis, a Unilever head who turned around one of their operations — is excellent news. He will be keen to prove he’s made of the right stuff.

He starts in October and there will definitely be new management initiatives and a plan of action to be carried out. The proof will certainly be in the pudding, but his track record is excellent.

So there we have it, three catalysts that could turn bears into bulls and see the stock re-rate, the P/E ratio rise from its current low of 11 — sales momentum turning more positive, focus on the UK sector and a management shake-up to deliver better results. In the meantime it will continue to pay you a dividend of over 5%, however!

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Alistair Ceurvorst owns shares in Tesco. The Motley Fool owns shares of Tesco.

It’s been a bit of a turbulent time for the mining sector as a whole – China’s slowing growth coupled with its growing internal production of raw materials has hampered global demand on the markets, and prices have compressed as a result. At the beginning of July 2013, the mining sector was pretty much a consensus short. Any contrarians out there with convictions in their ideas that bought at maximum pessimism would have seen a near-20% price appreciation for Rio Tinto since then, versus 12% for the FTSE 100.

If we first get our heads around the fundamental business aspects of Rio, perhaps we can better understand it and see if we have a viable investment opportunity.

Valuation

The valuation aspect of Rio Tinto is easier to get to grips with, so let’s first consider that. It’s currently trading on around 26x current earnings. There is a wealth of research on the fallibility of forecasts, so instead I prefer to focus on current earnings for valuations; there’s too much variation in using forecasted earnings.

Now, a P/E ratio of 26x isn’t exactly cheap and may have many value investors scoffing; however, there’s more to it than that. Rio is currently yielding 3.97%. This may not be anything to write home about, but the dividend cover is sensible at almost 2x so even if earnings took a turn for the worse, they might not need to cut the dividend to keep the lights on.

Quality Of Earnings

Rio Tinto is synonymous with iron ore. It’s the world’s second largest producer – behind Vale – so when times are good for iron ore, times are good for Rio and shareholders. So just what is happening with iron ore?

Iron has just dipped below $90 per tonne, which is not a pretty sight. In fact, it’s never been that low since 2012. When 96% of your earnings come from iron ore, then the price you can sell it for becomes incredibly important. Even more so when you pay your miners in Australian dollars and sell it to the market in US dollars.

In fact, a 10% change in average price of iron ore would affect Rio’s earnings by $1.2 billion. Fantastic news for rising prices; not so fantastic news for falling prices.

There is no doubt about the need for iron ore. Iron is a highly useful commodity and everyone, everywhere needs it. However, the demand for it is cyclical, and China has had enough for the moment. Perhaps other emerging-market nations are just about to step up and take the place of the great iron consumer – India? – but no one knows for the moment.

The Verdict

With a reasonable-looking dividend, perhaps that’s enough to tempt some into investing in Rio Tinto. For the moment, with iron prices in a slump and a former chief of the iron ore department, Sam Walsh, as CEO, I’m not confident in Rio’s ability to deliver sustainable shareholder value. It’s a bumpy ride in mining and Rio does have some excellent mines; if you have the patience to wait it out and not react to market noise, then maybe Rio Tinto is worth a second look.

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Alistair does not own shares in Rio Tinto.