Was Warren Buffett right to buy Tesco PLC (LON:TSCO) or was Neil Woodford right to sell?
This time last year, Warren Buffett, the famous billionaire US investor, and Neil Woodford, the ace UK fund manager, took polarised positions on the investment case for top FTSE 100 supermarket Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US).
Tesco had just issued its first profit warning in 20 years. Woodford was a seller. Buffett was a buyer. Rarely have two such renowned investors been effectively at the opposite ends of the same trade.
One year on, which of these two master investors currently looks to have made the right call?
Buffett buys big
In the wake of Tesco's profit warning, Buffett acquired an interest in over 150 million shares, increasing his stake in the company from 3.2% to 5.1%.
Buffett did the trade by entering into a somewhat complex equity swap deal. I'm going to take an average of the prevailing prices at the time -- a round-figure number of 320p -- and use that value to judge his performance. At last week's closing price of 350p, Buffett is 9% up on the trade.
Woodford spreads his bets
Was Woodford wrong to sell Tesco? Well, that rather depends on what he bought in its place.
In the report of his Invesco Perpetual High Income fund -- covering 1 January to 30 June 2012 -- Woodford told us:
"There was relatively little trading activity during the period. The fund sold its holding in International Power … and sold its holding in Tesco … It increased its holding in Capita (LSE: CPI) and also added to holdings in healthcare companies Elan, Sanofi (NYSE: SNY.US) and Smith & Nephew (LSE: SN)."
I've summarised Woodford's buys, the prices I calculate he bought at, and the returns to date in the table below.
|Company||Investment (£m)||Buy price per share||Share price at 18/1/13||Gain/loss (%)|
|Smith & Nephew||130||622p||697p||+12|
|Total weighted return|| || || ||+11|
There's not much in it, then, after one year: Buffett is up 9% on Tesco, but Woodford is slightly ahead with a weighted gain of 11% -- even though Elan has let him down badly so far.
What are the prospects for Tesco and Woodford's four companies in the coming year? The following table gives some forecast valuation data.
|Company||P/E||Earnings per share growth||PEG||Dividend yield|
|Smith & Nephew||14.3||4.7%||3.0||2.3%|
On these numbers, Tesco looks a clear 'value' winner. The supermarket takes top spot on low price-to-earnings (P/E) ratio and high yield. It also takes second place on earnings per share (EPS) growth and P/E to EPS growth (PEG); in the case of the latter, low equals better value.
Next best pick on the numbers is outsourcing group Capita, which comes top on two measures: EPS growth and PEG.
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> G A Chester does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares in Tesco and Smith & Nephew.