This is your chance to ride with the world's greatest investor.
It's a tough ask to buy retailers in the current economic environment. Unemployment is stubbornly high. Consumers are still concentrating on paying down their debts rather than spending up on the High Street. And banks are reluctant to extend credit to all but the most credit-worthy customers.
Yet over in the US, that hasn't stopped two of the world's best, famous and most successful investors, Warren Buffett and George Soros, reporting increases in their stakes of Wal-Mart, owner of Asda here in the UK.
In the most recent quarter, Soros' hedge fund upped its stake in Wal-Mart by 1 million shares, giving it ownership of 1.1 million shares. It's small beer compared to Buffett-run Berkshire Hathaway's near-doubling of its stake, soaring from 19.9 million shares to 37.8 million. Buffett's position in the company comes to more than $2 billion.
He's clearly a fan. He's also clearly a fan of the supermarket sector in total, as Buffett also owns a significant stake in our own Tesco (LSE: TSCO).
Going All-In
When he recently bought US railroad company Burlington Northern Santa Fe for a cool $44 billion, Buffett called in an "all-in wager" on the US economy.
With his stakes in Tesco and Asda (via Wal-Mart), Buffett also has some reasonable sized bets going here in the UK. Admittedly they are not $44 billion bets, but nevertheless, they are substantial.
Buffett is often mistakenly viewed as an investor who'll only buy companies on the very cheap. On the contrary, he is quite happy to pay a reasonable price to buy a great business. Of his purchase of Burlington, he said…
"It's a good asset for Berkshire to own over the next century…You don't get bargains on things like that. It's not cheap."
Despite the rapid run-up in the US stock market since its March 9 lows, Wal-Mart has been virtually snoozing -- the S&P 500 has gained 60% yet Wal-Mart has climbed just 16% from its low of the year.
A Tough Market To Beat
Tesco has done a little better, up 38% since the market's low, nicely ahead of supermarket rivals J Sainsbury (LSE: SBRY) and Morrisons (LSE: MRW), up 14% and 17% respectively, but lagging the FTSE's rise of 51%.
Since the bottom, if you're not a miner like Fresnillo (LSE: FRES) or previously beaten-down bank like Barclays (LSE: BARC), it's been a struggle to outpace the broader market.
From here on, I suspect things might change. Solid companies like Tesco haven't seen the massive gains of others, but then again, they didn't do a forward twisting double somersault with a half pike dive at the height of the credit crisis either. With most of the easy money seemingly already been made, the stage is set for companies like Tesco to outperform the market from here on.
In true Warren Buffett tradition, Tesco is not cheap. But nor are they off the radar expensive…far from it in fact, as witnessed by their forward P/E of around 14 and forward dividend yield of around 3%.
An investment in Tesco may not set the world on fire, but nor should it give you any sleepless nights. It's still the dominant UK supermarket retailer, and continues its measured expansion abroad, including China, where they will open 18 new hypermarkets in the twelve months up to February 2010.
Ride With Buffett
The UK economy is finally recovering. If you want to follow Buffett's strategy of paying a reasonable price for a great business, Tesco could be the bet for you. If it makes you feel any better, you'll be riding its fortunes right alongside the world's greatest investor.
More on the economy and the markets:
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> Bruce Jackson is riding directly with Buffett, courtesy of his holding in Berkshire Hathaway.
