With the outlook for the UK retail sector being somewhat uncertain, many investors may be nervous about buying shares in retailers. While this may be the case, Tesco(LSE: TSCO) appears to be on track to continue its successful turnaround that has helped to boost investor sentiment in the supermarket. In fact, Tesco's share price has risen by 22% since the turn of the year and there could be much more to come.
That's because Tesco seems to have the right strategy through which to improve its financial performance. For example, it's in the process of reducing costs, improving the efficiency of its supply chain and also making numerous asset disposals which should refocus the company on its core operations. Clearly, this strategy will take time to have a positive impact, but Tesco appears to be well on the way judging by its rising profitability.
For example, Tesco is forecast to more than double its pre-tax profit in the current year and then report further growth of around a third in the following year. This could positively catalyse investor sentiment in the retailer and with its shares trading on a price-to-earnings-growth (PEG) ratio of just 0.5, Tesco seems to be a sound buy for the long term.
Tough times ahead?
Another stock in the midst of a successful turnaround is high street baker Greggs(LSE: GRG). Its financial performance has improved dramatically since it returned to its core offering and commenced a major programme of closing unprofitable stores and opening new ones. Alongside improved menu choices and better quality products, this has propelled Greggs' bottom line northwards by around 50% in the last couple of years.
However, Greggs' share price has fallen by 18% since the turn of the year and this could be due to a forecast fall in its net profit of 5% in the current year. Furthermore, with Greggs trading on a price-to-earnings (P/E) ratio of 18.2 it seems to be relatively overvalued given its near-term outlook. Therefore, 2016 could be a tough year for the company's investors.
Meanwhile, food supplier and support services company Compass(LSE: CPG) remains a superb defensive play. Its bottom line has risen in each of the last five years and looking ahead, is forecast to do so in the current year and next year too. This means that the chances for a challenging year for the company's investors appear to be rather slim, with Compass Group's shares already having risen by 8% year-to-date.
While Compass is an excellent defensive stock, the prospects for an upward rerating appear to be somewhat slim. It trades on a P/E ratio of 21.9, but with earnings due to rise by 8% this year and by 9% next year, Compass shares could rise by a similar amount so long as it can maintain its current rating. With uncertainty being high and Compass providing stability and resilience, it would be unsurprising for it to become increasingly popular and end up outperforming the FTSE 100 in 2016.
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Peter Stephens owns shares of Tesco. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.