There was an unusually stark difference of opinion between two great investors about Tesco early in 2012. Just at about the time Buffett was filling up his trolley with the retailer, Neil Woodford was… checking out [groan]. Neither investor tends to deal in bite-sized portions and so, sure enough, the positioning was significant–Woodford took Tesco from about 3.5% of his portfolio to zero, while Buffett’s purchase made him one of Tesco’s biggest shareholders.
For any amateurs watching from the outside it was fun trying to guess at the different rationales being employed. Buffett presumably had found his renowned moat (in this case probably Tesco’s gorilla-like size and low-cost basis) and was armed with a long-term time horizon against Woodford and his “too many plates spinning” argument. Who would be correct? Well, I think it is now safe to say, that Woodford has clearly taken round one. This is the unhappy picture of the last three years (courtesy of Digital Look):
According to CNN, Berkshire is about $750 million down on its Tesco position. Not even the Sage is infallible (indeed I remember him taking an ill-advised punt on an Irish bank at the height of the Great Crisis/Recession/Shenanigans) but it will be instructive to see what–if anything–he does with his position now. Buy more, sell, or hold? Hold, is my guess. Woodford, as far as I can tell, has not darkened Tesco’s door since selling out.
But what was that maxim? Something about buying when the blood is running in the aisles? So, is Tesco now a buy for investors with a drop of sporting blood in their veins? Indeed DIY Investor has already pounced with the alacrity of a ravenous owl on a small, plump vole.
Tesco’s property assets should be mentioned: DIY Investor quotes a valuation of 220p per share for these and the margin of safety that they provide is something that I remember Terry Leahy referring to in the past. I have no doubt the hedgies and activists will already have been all over (indeed spinning-off property was the bulk of a thesis one made by Elliott recently for investing in Morrison) this aspect.
Meanwhile, if earnings come in at 21.95 (the estimate on Digital Look), with the current share price at 194.9 it means the supermarket is currently selling with a juicy earnings yield of 11.26%, which is compelling. But, for me, another major plus point is Tesco’s dominance of the online grocery market, which according to this article means it takes nearly 50p of every £1 spent. Not too shabby for a struggling business and online dominance must be a useful ally for its battery of convenience (Extra and Metro) shops. If the future of shopping is a big, weekly shop online and a number of small top-up shopping trips to convenient locations, then Tesco already looks to be well covered. Perhaps it should just start divesting itself of its out-of-town warehouses and those awful new child-friendly restaurants? Is anybody really going to spend an afternoon in a Tesco-owned shopping mall through choice?
So, am I going to buy into Tesco directly (I already own some via Berkshire)? It is about opportunity cost for me; Tesco is a very tempting situation but I have been gradually building up my positions in IBM, JP Morgan, and Diageo this year. Do I want to allow myself to be diverted by Tesco? I might do and will think about it over the coming days (thumb-sucking, I think Charlie Munger rather disparagingly calls this). Tesco is a high quality company at a below average price.
Disclosure: Long BRK.B.
Disclaimer: This post is not a recommendation to either buy or sell. Please consult your investment advisor.