Will the hapless supermarket join Sainsbury’s and Morrisons and trade below book value?

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What Is To Stop Tesco
Dropping To 134p?

  • Buffett’s nightmare investment – greatest investor alive is down £400m-plus on Tesco
  • Sell now, and not only will you suffer the trauma of locking in a massive paper loss, but you could double up your misery...
  • You know things are bad when you have to resort to book value to assess a share
Thursday, 25th September 2014

Maynard Paton

Dear Fellow Fool,
 
There’s never a dull moment in this market…
 
I mean, just as a euro-style currency crisis was averted following the Scottish independence NO result…
 
Tesco then owns up to accounting irregularities of £250m and effectively issues its third profit warning since July.
 
If you own Tesco shares and are sitting on a thumping loss, don’t worry too much – at least you’re in good company.
 
Ace stock-picking billionaire Warren Buffett first bought into the supermarket way back in 2006 at about 333p – and eight years later with the price at 195p he’s down 40% before dividends.
 
Yep, even the greatest investor alive makes mistakes. He spent more than £1 BILLION on Tesco shares and I reckon his paper losses currently run to about £439m. It’s fair to say he’s having a bit of a nightmare with this investment.
 

Woodford said it was “undoubtedly a cheap asset” at 320p, but he still sold anyway

 
Not surprisingly, the pundits have been laying the boot into Tesco.
 
For instance, Marc Kimsey, a senior trader at Accendo Markets, read the statement, evaluated the situation and sent me a simple e-mail to declare:
 
Tesco is no longer a viable investment.
 
Meanwhile, an ordinary Fool quickly visited our discussion boards to reveal his thoughts:
 
That tops it for me. In 10 minutes I'll be an ex TSCO shareholder.
 
It’s not hard to see why the City is bearish and shareholders want out. The news at Tesco has been grim since that infamous profit alert of January 2012, when the supermarket warned of disappointing Christmas sales and saw its shares drop from 400p to 320p.
 
Selling out back then was Neil Woodford.
 
At the time, many thought the income guru had lost it.
 
After all, Tesco had decades of profit and dividend growth behind it, while the warning looked like a blip. Even Woodford admitted a few months later Tesco was “undoubtedly a cheap asset and I am always loath to sell at depressed valuations”…
 
However, he also claimed: “But I am confronted with other investment opportunities which are as cheap but which do not, in my opinion, face the same level of risk.
 
I bet Buffett wished he sold at 320p. I bet many of you wish you had, too.
 

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There is a massive chance of immense psychological suffering here

 
Successful selling is the hardest part of investing.
 
You see, get out at the first sign of trouble and you’re always likely to lock in your losses and never make any money.
 
All companies suffer problems from time to time. Yet most turn out to be short-term issues that go on to become distant memories as the business recovers strongly and the share price shoots higher.
 
But when the problems come thick and fast, what then?
 
I mean…
 
You thought about selling Tesco at 320p with Woodford… but held on instead.
 
You then thought about selling Tesco at 250p when Philip Clarke quit amid a profit warning...but held on instead.
 
You then thought about selling Tesco at 225p when new boss Dave Lewis cut the dividend by 75%...but held on instead.
 
And now you’re thinking about selling Tesco at 195p after the accounting irregularities disaster...
 
However, you’re also worried what could happen if you do sell.
 
Because if you ditch the shares now, perhaps you could end up being the complete mug who capitulates right at the bottom after all the bad news.
 
In fact, there’s a massive chance of immense psychological suffering here.
 
Sell today, and not only will you suffer the trauma of locking in a massive paper loss, but you could double up your misery by missing any subsequent recovery.
 
Indeed, make the wrong decision, and the emotional rollercoaster you’re riding with Tesco could put you off shares and the stock market for life.
 
As I mentioned last week, for all the pessimism, Tesco still retains a massive market share and its size and status should make its current predicament quite fixable in time.
 
Plus you have every man and his dog writing the company off, which should make now the exact time to buy for smart contrarian investors.
 

But will Tesco join Sainsbury’s and Morrisons and trade below book value?

 
That said, there’s a good chance of even more bad news, not least because Tesco’s next results have been delayed by three weeks. I can visualise the kitchen sink being prepared as I write.
 
Tesco’s warnings have signalled first-half trading profits will be down close to 50% to £850m, while the interim dividend will be reduced 75% to 1.16p. But what the second half will bring is anyone’s guess, leaving projected P/E multiples and dividend yields essentially useless.
 
So you know things are bad when you have to resort to the balance sheet and book value to assess a share.
 
For what it’s worth, Tesco’s last accounts showed tangible assets of almost £11bn, or roughly 134p per share.
 
Now I don’t want to alarm you, but right now J Sainsbury has a tangible asset value of 299p per share and yet its shares trade below that figure at 265p. And of course, Sainsbury’s does not (at least, not yet) have the same profit, dividend and general accounting distress of Tesco.
 
William Morrison, meanwhile, does have its problems and its 175p share price is also below its tangible book value of 179p per share.
 
The simple upshot is that if other quoted supermarkets can trade below their book value, then what is to stop Tesco’s share price dropping from 195p to 134p and below…
 
Let’s hope Buffett knows the answer. Because to be brutally honest, I am not sure. 

 
Maynard Paton

Maynard Paton,
Editor & Investment Writer,
The Motley Fool UK

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Final few days... this special offer must end Tuesday!

Get 2 years of access to our premium share-picking service
 AND 3 FREE exclusive investment reports for just £98

  • Receive our TWO latest, fully researched share recommendations every month, for the next 2 years – AND ongoing coverage for all of our previous picks
  • ZERO GUESSWORK – we’ll tell you which shares we think you should buy now to profit from the stock market
  • PLUS! 3 bonus investing reports including Shares 2014 – The Investor’s Guide to Outsmarting The Market ... This popular report comes complete with 7 top share ideas for new money.

To lock in this incredible 72% discount right now, click here for full details...

Disclosure: Maynard does not own any share mentioned in this e-mail. The Motley Fool owns shares in Tesco.

 
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