My Tesco shares are down 37% so far this year (including dividends). Ouch! What has that done to my overall portfolio? In fact I'm still slightly in profit for the year, thanks mainly to Berkshire Hathaway, my largest holding, up 21% in sterling terms. The FTSE 100 is slightly down for the year, even including dividends, so I'm marginally outperforming. But of course that's little consolation when Tesco are dragging down my overall performance from ~11% to under 2%.
Thanks to the precipitous drop, Tesco is now only about 10% of my portfolio, from a peak of 26%. At least they can't do too much more damage to my wealth from here... unless I buy more!
Why did I buy Tesco in the first place? My reasoning from the last time I bought in April 2012 was that they:
- Are dominant in the UK and therefore have economies of scale, making it hard for competitors.
- Have a trusted brand which they can leverage in other markets.
- Are in a cautious economic environment in which their current profits are depressed.
- Have a high-growth international business.
- Are in a non-risky business requiring little in the way of capital investment and R&D.
- Are in a business that is largely inflation-proof.
So what went wrong?
- Competitors appear to be assaulting their position quite effectively. Tesco may have economies of scale but it clearly doesn't give them enough pricing power to stop shoppers defecting to Aldi and Lidl.
- Their brand is being dragged through the mud due to their recent financial irregularities - how many people are going to want a Tesco bank account when the papers are full of stories of missing cash? Thus an accounting problem has a double-whammy effect on the share price both directly and indirectly.
- When times were good Tesco's employees were buoyed by the company share plan that they were encouraged to join - presumably they're now quite dispirited due to the recent falls. Again, a multiplying effect linked to the share price.
- Their international business hasn't been looking so hot recently.
- Non-risky business - yes, except for the Germans stealing your lunch, and your own executives fiddling the books. And a sector with cut-throat competition may mean nobody makes any profits, even if revenues are highly predictable.
- Capital investment demands may be higher than expected - and there's a suspicion that Tesco have been under-investing for several years in order to boost the bottom line.
So, not everything as rosy as I predicted. On the other hand, revenue has been stable for several years, they're currently valued at less than a quarter of their revenue, approximately equal to their book value. But Sainsbury's is valued even lower, at a sixth of revenue and 75% of book, and their share price has fallen almost as much as Tesco this year, so it's not obvious that Tesco are a bargain at this price.
So what am I going to do with this dog of a share? One thing I know for sure - I'll be selling these shares before the year end to crystallize the capital loss, which I can offset against income tax in Norway. But will I buy them again come January 1st? That's the question...
