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A lot of old school UK shares have performed well in recent weeks. For example, names like Tesco (LSE: TSCO), BP, and Rio Tinto have soared.
Looking ahead, I wouldn’t be surprised to see these kinds of stocks command higher valuations. Because right now, there’s a powerful shift in the market that’s resulting in old school stock market names gaining a lot more interest.
AI resilience could attract more investors
The shift I’m referring to is stemming from the disruptive potential of artificial intelligence (AI). Recently, it’s become clear this technology’s going to disrupt a range of businesses in the years ahead including software companies, law firms, marketing firms, and media businesses (any white collar-type business, basically).
But here’s the thing – the UK stock market’s home to many companies that look relatively immune to AI disruption. Tesco, BP, and Rio Tinto are all good examples.
Whereas a software company could potentially be replaced by an AI application, the same can’t be said for Tesco. In the AI era, Britons are still going to need to eat.
And a company like Tesco could actually benefit quite a lot from AI. For example, it could use the technology to better analyse Clubcard data, enhance customer support activities, streamline supply chain and logistics activities, and reduce marketing costs.
This potential immunity from AI disruption is reflected in Tesco’s share price over the last few weeks. As software companies such as London Stock Exchange Group, Sage, and RELX have seen their share prices plummet, Tesco’s share price has jumped about 10%.
Clearly, investors are starting to see more appeal in this company. Taking a long-term view, there’s far less uncertainty with this type of stock than a software name.
Zooming in on the valuation, Tesco currently trades on a forward-looking price-to-earnings (P/E) ratio of about 14. Historically, that’s quite high for a UK grocery business.
Could the stock command a higher valuation in a world that’s about to be disrupted by AI? Possibly.
It wouldn’t surprise me if investors were willing to pay 17-18 times earnings for this company going forward. Because history shows that investors are willing to pay up for companies with stable revenues and earnings.
Worth a look today?
Of course, there’s no guarantee that Tesco shares will keep rising from here. While AI may not be a huge threat to this company, it faces plenty of other risks.
Competition from Aldi, Lidl, Asda, Amazon and other companies is one risk that can’t be ignored. Higher costs from investments in AI is another one to consider.
I believe the stock’s worth a closer look today however. With investors now starting to focus on companies that are immune to AI disruption, I see potential here.
