Following the Footsie's fall, here's why I'd sell Tesco plc and buy Imperial Brands plc

Shares in Tesco(LSE: TSCO) have been climbing since last summer, putting on 20% since July to reach 202p. But they have been higher, and were knocked back a bit by this week's world stock market panic which depressed the FTSE 100 as a whole.

Does that slight cooling make Tesco a buy now? I still say no, and I'll tell you why.

Firstly, the supermarket giant is in the news this week for a disappointing reason, as it faces the UK's largest ever equal pay claim. A claim by lawyers that hourly-paid female staff earn less than men despite doing comparable work is behind a case brought for an initial 100 employees. If successful, Tesco could be footing a bill of up to £4bn in back pay.

Rosy spectacles

But even without that, I just don't see Tesco shares are being good value -- not even after a healthy Christmas trading period. Like-for-like food sales were up 3.4%, with the company recording its biggest ever sales week in the UK.

But that fell short of analysts' expectations, and I think there was too much optimism already priced into the shares -- which are on a forecast P/E of 19. And that's with the dividend expected to yield only 1.4%. Sure, we have two years of strong EPS growth forecast, and the divided yield is predicted to grow to 3.5% by 2020.

But with consumer confidence weak and competition from the Aldi and Lidl duo piling on, I see those forecasts as over-optimistic. I wouldn't be surprised to see them lowered as the impact of the poorer-than-expected Christmas period sinks in.

If I owned Tesco shares, I'd take advantage of the recent rise, and I'd sell them to buy something more attractive.

Doom and gloom

That might well be Imperial Brands(LSE: IMB) whose shares have been moving in the opposite direction to Tesco's. Over the past 12 months, we've seen a 28% fall to today's 2,710p, and I see no rational reason for it.

Forecasts for the Neil Woodford favourite have been affected by the strong recovery in the pound, but one weaker year due to that merely balances a previously strengthened year while sterling was plummeting.

Forecasts now suggest a 3% drop in EPS this year, but followed by a 7% gain next year -- and overall, I see no long-term issue here.

I also don't see any threat to the firm's dividend, which is currently expected to yield 6.6% (and rising to 7.2% in 2019). Imperial is a strongly cash-generative company, and cover by earnings of around 1.35 times looks perfectly adequate to me, so I'm confident about the cash.

Low valuation

We're looking at a P/E based on 2018 forecasts of 11, and that would drop to just 10.3 by September 2019. Imperial is a FTSE 100 company, it pays one of the best dividends there is, and its business shows no sign of faltering.

Although smoking is a dying art in the developed world, there are billions of folk with rising incomes who are likely to keep Imperial going for many decades yet. And much of the potential for alternative smoking technology is still untapped.

Moral issues might well keep you away from investing in a tobacco company, but purely from a financial perspective I see Imperial Brands as one of the FTSE 100's tastiest bargains right now.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.