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What You Were Buying Last Week: Tesco Plc

One of Warren Buffett’s famous investing sayings is “be fearful when others are greedy and greedy only when others are fearful” – or, in other words, sell when others are buying and buy when they’re selling.

But we might expect Foolish investors to know that, and looking at what Fools have been buying recently might well provide us with some ideas for good investments.

So, in this series of articles, we’re going to look at what customers of The Motley Fool ShareDealing Service have been buying in the past week or so, and what might have made them decide to do so.

Refreshing change

It wasn’t so long ago that Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) was the darling of the stock market.  It enjoyed market dominance in the UK, and was all set to expand its successful international operations to the retail mecca of the US.

It still enjoys dominance in the UK — its market share is still almost as much as main rivals Asda and Sainsbury put together. But domestic sales are sliding, sales in its historically strong Asian operations declined almost 4% in Q1 this year, and its plans to conquer the US now lie in ruins, with the company booking a £1.2bn loss on its Fresh & Easy chain, for which it is still seeking a buyer.

On the face of it, there doesn’t seem much to encourage any buyers of Tesco shares — but there were enough of them to put the supermarket giant (it’s the world’s third-largest food retailer) into the number three spot in the latest “Top Ten Buys” list*. So where’s the good news? 

Well, Tesco is now over a year into its £1bn ‘Build a Better Tesco’ investment plan aimed at turning around its core UK business, which still accounts for 60% of group revenues. More staff are being employed, outdated stores are being “refreshed”, Tesco-branded products are being relaunched, it’s augmented its already strong online presence with a “Click & Collect” service that turns its stores into a takeway, and has introduced a “Price Promise” aimed at matching competitors on both branded and own brand goods. Whilst there’s a lot more to be done, and the long-term effect of the plan on the bottom line remains to be seen, Tesco has made a solid start on reinvigorating itself.

Despite its recent woes, Tesco still pays a healthy dividend, currently 4.5%. And although earnings that are expected to actually fall next year, before picking up a bit again the year after, the dividend is forecast to rise to 4.9% by 2015. On a forward P/E of under 10, last week’s buyers have got Tesco at a discount, just so long as it really can deliver on earnings in the longer term.

Tesco is a supertanker of a business. It will take a lot of time and effort to alter its direction. However, if management can get it back on the right course again… (That’s quite enough of the supertanker metaphor – Ed.)

But of course, no matter what other people were doing last week, only you can decide if Tesco really is a ‘buy’ right now.

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> Jon owns shares in Tesco. The Motley Fool also owns shares in Tesco.