Value investors are often guilty of buying and selling their shares too soon. Investors hoping for a recovery at Tesco (LSE: TSCO) have certainly seen a few false dawns. But I believe the firm's recent progress confirms the start of a genuine turnaround.
Tesco's net debt fell by 40% to £5.1bn last year. Excessive debt was arguably the biggest financial risk facing the firm, so this should be a relief for shareholders.
Despite a number of divestments, underlying operating profit rose by 1% to £944m. Significant progress was made in the UK, where like-for-like sales rose by 0.9% during the final quarter of the year.
Underlying all of this was a significant improvement in cash flow. Operating cash flow from retail operations rose by 39% to £2.6bn, although this did include some of the firm's discontinued businesses.
Yet despite all of this progress, these figures -- from Tesco's final results -- triggered a 15% slide in the supermarket's share price. One reason for this may be that chief executive Dave Lewis warned that the pressure to cut prices could limit any improvement in profit margins this year.
Investors may be impatient for short-term results, but I think the long-term picture is attractive. In my view, what's important is that the UK's largest supermarket is starting to transform itself into an efficient and growing retailer.
At the current share price of 165p, I believe that Tesco shares are an increasingly compelling buy. Forecast earnings per share of 6.5p put the stock on a forecast P/E of 25 for the current year, falling to 18 next year. A dividend yield of 1% is forecast for 2016/17, rising to 2.2% next year.
I reckon now could finally be the right time to invest in Tesco's turnaround.
Turnaround gets in gear
Over at insurance firm Aviva (LSE: AV), the situation is completely different. Aviva's turnaround has been under way successfully for some time now. The results make it clear that chief executive Mark Wilson is delivering on his promise to de-risk the firm's balance sheet and focus on cash flow and new business.
Despite this, Aviva has fallen out of favour in recent months and the shares are down by 12% so far in 2016. In my view, this decline means that Aviva shares now look good value relative to book value, forecast earnings and dividend payments.
Aviva's latest reported book value is 389p per share. The current share price of 452p represents a P/B ratio of 1.16. This is much lower than peers such as Prudential and Legal & General, which both have P/B ratios of more than 2.
In terms of earnings, current forecasts suggest that Aviva will report earnings of 49p per share this year, and pay a dividend of 23.1p. This puts the stock on a forecast P/E of 9.1 and gives a well-covered prospective yield of 5.1%.
In contrast, Legal & General and Prudential both trade on about 12 times 2016 forecast earnings. While Legal & General's forecast yield is higher, it's only covered 1.4 times by forecast earnings, versus cover of 2.1 times for Aviva.
Roland Head owns shares of Aviva, Legal & General and 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.