Gamble of the week: a glimmer of hope for this troubled supermarket

This supermarket has been through some tough times, says Alex Williams. But the worst could finally be over.

Three years ago, the idea of putting Tesco (LSE: TSCO) into a "gamble of the week" column would have been unimaginable. One in every seven pounds spent in British shops flowed through its tills, totting up to group sales of $64bn in 2012. But since then, Tesco has hit consecutive crises, including an accounting scandal, a change of management and an unimpressive move into banking.

It has struggled with stiff competition from cut-price rivals, such as Aldi and Lidl, and has been slow in adapting to online deliveries, having invested heavily in small, local stores. Ocado's super-efficient distribution system may have struggled to turn a profit, but it has also left Tesco's vast network of stores and depots looking costly and dated. News last week of a tie-up between Morrisons and Amazon, the US giant that has guzzled market share in everything else that can be bought online, was yet another blow.

Yet Tesco's shares are rising. Having fallen by two thirds since their peak in 2007, shares rallied to a five-month high this week. Market research group Kantar released figures on Tuesday showing that Sainsbury's is winning the supermarket price war, but Tesco's sales have stabilised.

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On top of good trading figures over Christmas, the figures are far from "a one-off", wrote Barclays. Macquarie and Bernstein, two research houses, are also bullish. There is no dividend for hangers-on, but a free cash flow yield of 8% to 10% gives Tesco the ability to reinvest. The worst could finally be over.