Should You Sell Tesco PLC And Buy Big Fallers Poundland Group PLC and Sports Direct International Plc?

It's been a tough six months for investors in Poundland Group (LSE: PLND) and Sports Direct International (LSE: SPD). Shares in both companies have fallen by about 50% since last September.

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This sinking feeling will be familiar to many Tesco (LSE: TSCO) shareholders, but times seem to be changing. Tesco shares have risen by 30% so far in 2016, leaving shareholders who bought-in at the end of last year with a fat profit.

Of course, many longer-term investors -- including me -- will still be underwater on their Tesco holdings. Unfortunately that situation could continue for several more years.

Tesco's earning power looks likely to have been permanently damaged by the supermarket price war and the firm's own financial problems.

What's important now is for us to see where the best opportunities lie for the future. Can Tesco keep climbing, or are bigger potential profits on offer at Poundland and Sports Direct?

Tesco

Tesco shares currently trade on a massive 42 times 2015/16 forecast earnings. Earnings per share are expected to double to 8.7p in 2016/17, reducing the supermarket's forecast P/E to 22.

However, that's still high. I'd argue that a P/E of about 12 would be more realistic for a low-growth, low-margin business like this. That implies earnings per share of about 16p, which doesn't seem likely for another 2-3 years.

Tesco isn't expected to pay a dividend for the current year, either. Consensus forecasts suggest a payout of just 1.33p per share for next year. I suspect that most of Tesco's recovery potential is already reflected in its share price.

Poundland

After a promising start following its 2014 flotation, things have gone downhill for Poundland. Earnings per share are expected to fall by 26% to just 9.8p this year. This leaves the stock on a 2016 forecast P/E of 17.

Earlier this week, the firm's chief executive announced his intention to stand down, suggesting he isn't overly optimistic about a quick recovery.

However, Poundland does have some redeeming features. The group had net cash of £66m at the end of September. It generated enough free cash flow to comfortably cover last year's 4.5p per share dividend.

If Poundland can complete its integration of the 99p Stores chain and find a new boss to address recent sales disappointments, then earnings could rise strongly.

Sports Direct

Shares in Sports Direct have plummeted in recent months, thanks to a wave of bad press and a profit warning in January.

Analysts have adjusted their forecasts accordingly. Sports Direct is now expected to generate earnings of 37.3p per share for the current year, down by 5% from 39.4p per share last year.

This means that at the current share price of 400p, Sports Direct has a forecast P/E of about 10.5. That doesn't seem expensive for a business with almost no debt and an attractive 9% operating margin.

Offsetting this are the risks involved in investing in a company that pays no dividend and has a very active controlling shareholder. I'm not sure how closely founder Mike Ashley's interests are aligned with those of ordinary shareholders.

Despite these concerns, a turnaround seems quite likely to me. At 400p, the shares could be decent value.

However, I'm not convinced that any of these stocks is a red-hot buy in today's market. I believe there could be better opportunities elsewhere in the retail sector.

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Roland Head owns shares of Tesco. The Motley Fool UK has recommended Sports Direct International. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.