Investors in Tesco Plc (LON:TSCO), J Sainsbury plc (LON:SBRY) and Wm. Morrison Supermarkets plc (LON:MRW) should take care.
Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US), which reported its Christmas period trading last week, is my biggest holding. I've also got decent slug of J. Sainsbury (LSE: SBRY) and Marks & Spencer (LSE: MKS).
But should the market -- as I expect -- turn down with a reasonable correction in the weeks or months ahead, then I plan on buying a decent-sized holding in Morrisons (LSE: MRW), which is presently trading close to a 52-week low.
The logic isn't difficult to see: Morrisons is on a lower price-to-earnings (P/E) ratio than any of them, offers a better prospective yield than Tesco and Marks & Spencer, and has a lot of potential upside if the business can get to grips with convenience stores and online shopping.
One piece of information I'm not factoring into my calculations, though, is the most recent batch of Christmas trading updates.
For some reason, pundits seize on these each year -- perhaps because there's not much else around by way of market news -- and then make all sorts of pronouncements based on the picture that they see in the entrails.
Is that rational? Or even vaguely sensible? Let's review the facts.
- The three months in question are skewed by the sale of highly seasonal and atypical items: turkeys, booze, festive goods and gifts.
- Analysts, as with this year's results from Tesco, often seize most on the immediate run-up to Christmas -- a six-week period, which the stores obligingly break out for them.
- Generally, the companies are quoting sales figures, not profit figures. So a company that discounts heavily does well in sales terms, and a company that doesn't, doesn't. Yet the picture with respect to profits may be the reverse.
Last year's results from Tesco were a case in point. Widely billed as a profit warning (although they weren't), the results acknowledged some deficiencies in the core UK business, and management announced a plan to correct them.
Joe Public and headstrong fund managers promptly piled out of the shares, probably nursing losses if their initial purchase of Tesco shares had been since the market's nadir in early 2009.
But Warren Buffett promptly piled in to take his stake in the company to over 5%. I tripled my own holding. And today, 12 months on, the share price is back to where it was in the first place. Did those investors who sold out think they did the right thing? If that's you, then answers in the box below, please.
Neil Woodford, it's fair to say, was one of the sellers. But it's also fair to say that he's playing a different game from Buffett. Woodford is an income investor, responding to demands from his shareholders for a reliable stream of growing dividends.
And whatever else it delivered, Tesco management's turnround plan for the UK business was going to deliver minimal, if any, dividend growth for the next year. So who can blame Woodford if he saw better dividend growth prospects elsewhere?
Yet for investors with a longer-term horizon, and less focused on income -- Berkshire Hathaway doesn't pay a dividend, remember -- the result was a buying opportunity, courtesy of a market over-reaction to those Christmas trading results.
The Woodford factor
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> Malcolm owns shares in Tesco, Sainsbury, and Marks & Spencer. The Motley Fool owns shares in Tesco.