What do you think has happened to Tesco (LSE: TSCO) shares over the past five years?

In some ways, the nation’s leading supermarket chain ought to be a bellwether of the British economy. The FTSE 100 index of leading British shares – of which Tesco is itself a member – is up by 51% over the past five years.

Interestingly though, Tesco has done much better.

Strong share price gain

Today, buying 1,000 Tesco shares would set an investor back roughly £4,666.

That is 82% higher than five years ago, when 1,000 Tesco shares cost around £2,564.

So, while the FTSE 100 has moved up 51% during that period, Tesco has done around 60% better than that.

Why might that be – and what does it mean for the valuation now? Ought I to invest?

What’s driven the share price growth?

The stock market tends to be an imperfect pricing mechanism on a day-to-day basis.

As a long-term investor I can use that to my advantage, by trying to buy shares when they are priced well below what I think their long-term value ought to be.

So, does that mean Tesco shares were cheap five years ago?

Not necessarily.

That is one possible explanation for the price gain. But another is that the share was fairly priced then but is overpriced now.

Another potential explanation is that the prospects for the company look much better now than they did five years ago and the share price gain simply reflects that.

A great business, but it has its challenges

Tesco has had a good few years.

Last year saw revenues grow handily. The net profit of £1.8bn after tax was impressive.

Tesco continues to benefit from its strong market position, with sizeable economies of scale. The brand is well known, something that has long been helped by a well-run loyalty programme. It has a regular customer base in the millions.

But those strengths were also true five years ago.

Meanwhile, the UK grocery market is as competitive as ever, with rivals like Aldi and Lidl continuing to grow. That poses a risk to profit across the industry as different chains compete on price. As market leader, that is a particular risk to Tesco.

Indeed, that competitive environment helps explain why last year’s net profit was ‘only’ £1.8bn. That is a huge amount of money, but given that revenues (excluding VAT, including fuel) were over £70bn, it represents a net profit margin of 2.4%.

That margin is slim – and supply chain inflation due to the ongoing Middle East conflict could put even more pressure on profit margins.

I see better value elsewhere right now

At 3.1%, Tesco’s dividend yield is marginally above the FTSE 100’s.

But the strong rise in Tesco shares over the past five years means that they are not currently attractively priced in my view.

At 17 times earnings, I do not see the share as wildly overpriced. Tesco has a lot of strengths. But I also do not see the price as attractive for a company with thin profit margins that look set to stay that way.

So for now, I will not be buying Tesco shares. Fortunately in the current market I see lots of other opportunities I think are worth considering.

What growth stock do we like better than Tesco Plc right now?

One of our Share Advisor analysts has just released a brand new stock report that we think is a must-read for any investor looking to try and generate potential growth.

And the best bit is that you can see if for yourself, right now, absolutely free of charge!

No jargon. No hard sell. Just a clear look at a growth share idea we think is worth your time.

Christopher Ruane does not hold any positions in the companies mentioned.