The Motley Fool

What Is To Stop Tesco PLC Dropping To 134p?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

TescoThere’s never a dull moment in this market…
 
I mean, just as a euro-style currency crisis was averted following the Scottish independence NO result…
 
Tesco (LSE: TSCO) then owns up to accounting irregularities of £250m and effectively issues its third profit warning since July.
 
If you own Tesco shares and are sitting on a thumping loss, don’t worry too much – at least you’re in good company.
 
Ace stock-picking billionaire Warren Buffett first bought into the supermarket way back in 2006 at about 333p – and eight years later with the price at 195p he’s down 40% before dividends.
 
Yep, even the greatest investor alive makes mistakes. He spent more than £1 BILLION on Tesco shares and I reckon his paper losses currently run to about £439m. It’s fair to say he’s having a bit of a nightmare with this investment.

Woodford said it was “undoubtedly a cheap asset” at 320p, but he still sold anyway

Not surprisingly, the pundits have been laying the boot into Tesco.
 
For instance, Marc Kimsey, a senior trader at Accendo Markets, read the statement, evaluated the situation and sent me a simple e-mail to declare:
 
Tesco is no longer a viable investment.
 
Meanwhile, an ordinary Fool quickly visited our discussion boards to reveal his thoughts:
 
That tops it for me. In 10 minutes I’ll be an ex TSCO shareholder.
 
It’s not hard to see why the City is bearish and shareholders want out. The news at Tesco has been grim since that infamous profit alert of January 2012, when the supermarket warned of disappointing Christmas sales and saw its shares drop from 400p to 320p.
 
Selling out back then was Neil Woodford.
 
At the time, many thought the income guru had lost it.
 
After all, Tesco had decades of profit and dividend growth behind it, while the warning looked like a blip. Even Woodford admitted a few months later Tesco was “undoubtedly a cheap asset and I am always loath to sell at depressed valuations”…
 
However, he also claimed: “But I am confronted with other investment opportunities which are as cheap but which do not, in my opinion, face the same level of risk.
 
I bet Buffett wished he sold at 320p. I bet many of you wish you had, too.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

There is a massive chance of immense psychological suffering here

Successful selling is the hardest part of investing.
 
You see, get out at the first sign of trouble and you’re always likely to lock in your losses and never make any money.
 
All companies suffer problems from time to time. Yet most turn out to be short-term issues that go on to become distant memories as the business recovers strongly and the share price shoots higher.
 
But when the problems come thick and fast, what then?
 
I mean…
 
You thought about selling Tesco at 320p with Woodford… but held on instead.
 
You then thought about selling Tesco at 250p when Philip Clarke quit amid a profit warning…but held on instead.
 
You then thought about selling Tesco at 225p when new boss Dave Lewis cut the dividend by 75%…but held on instead.
 
And now you’re thinking about selling Tesco at 195p after the accounting irregularities disaster…
 
However, you’re also worried what could happen if you do sell.
 
Because if you ditch the shares now, perhaps you could end up being the complete mug who capitulates right at the bottom after all the bad news.
 
In fact, there’s a massive chance of immense psychological suffering here.
 
Sell today, and not only will you suffer the trauma of locking in a massive paper loss, but you could double up your misery by missing any subsequent recovery.
 
Indeed, make the wrong decision, and the emotional rollercoaster you’re riding with Tesco could put you off shares and the stock market for life.
 
As I mentioned last week, for all the pessimism, Tesco still retains a massive market share and its size and status should make its current predicament quite fixable in time.
 
Plus you have every man and his dog writing the company off, which should make now the exact time to buy for smart contrarian investors.

But will Tesco join Sainsbury’s and Morrisons and trade below book value?

That said, there’s a good chance of even more bad news, not least because Tesco’s next results have been delayed by three weeks. I can visualise the kitchen sink being prepared as I write.
 
Tesco’s warnings have signalled first-half trading profits will be down close to 50% to £850m, while the interim dividend will be reduced 75% to 1.16p. But what the second half will bring is anyone’s guess, leaving projected P/E multiples and dividend yields essentially useless.
 
So you know things are bad when you have to resort to the balance sheet and book value to assess a share.
 
For what it’s worth, Tesco’s last accounts showed tangible assets of almost £11bn, or roughly 134p per share.
 
Now I don’t want to alarm you, but right now J Sainsbury (LSE: SBRY) has a tangible asset value of 299p per share and yet its shares trade below that figure at 265p. And of course, Sainsbury’s does not (at least, not yet) have the same profit, dividend and general accounting distress of Tesco.
 
Morrisons (LSE: MRW), meanwhile, does have its problems and its 175p share price is also below its tangible book value of 179p per share.
 
The simple upshot is that if other quoted supermarkets can trade below their book value, then what is to stop Tesco’s share price dropping from 195p to 134p and below…
 
Let’s hope Buffett knows the answer. Because to be brutally honest, I am not sure. 

One Killer Stock For The Cybersecurity Surge

Cybersecurity is surging, with experts predicting that the cybersecurity market will reach US$366 billion by 2028more than double what it is today!

And with that kind of growth, this North American company stands to be the biggest winner.

Because their patented “self-repairing” technology is changing the cybersecurity landscape as we know it…

We think it has the potential to become the next famous tech success story.

In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

The Motley Fool owns shares in Tesco.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.