The Beginners’ Portfolio Ponders Selling Tesco PLC

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I’ll take a more detailed look at the Beginners’ Portfolio valuation soon, but for now I’m happy to reveal that it is up 42% since inception — that’s pleasing progress since July, when we were looking at a 32% gain. Also, all of our shares are now beating their purchase prices, though a couple have not quite yet gained enough to cover the costs of buying and selling.

But what I most want to do today is what all shareholders should do at intervals, and that’s re-examine a few holdings to see if any are coming close to their sell-by date:

Happy with Tesco?

tescoWhen I selected Tesco in May 2012 at 305.5p, it was for a number of reasons. I thought the sell-off due to the company’s poor Christmas trading period was overdone and the shares were simply too cheap. And though there clearly were some structural problems with the company, I thought they’d be solved in a relatively short time. Finally, I’ve always admired Tesco’s know-how when it comes to international expansion.

I’m happy with my first criterion. The shares were indeed oversold and they’re at 365p today, and we’re up 14.5% after costs.

As for the speed of recovery, well, it’s happening. But nearly 15 months on, we’re still only looking at a forecast earnings rise of 1% for the year to February 2014 and 5% a year later — forecasts for the two years for rival J Sainsbury suggest 6% and 6%, and Sainsbury’s offers a better dividend as well.

I’ve also had reason to doubt my early confidence in Tesco’s overseas nous. Though I was impressed with expansion in south east Asia, attempts in the USA and Japan were pretty disastrous. And now we’ve heard that the firm is giving up on going it alone in China and will merge its business with China Resources Enterprise. That’s a sensible move, but I wonder why Tesco was getting it wrong for so long.

I don’t think these are reasons to sell Tesco right now and we’ll Hold, but with a reasonable bit of the undervaluation now out, it could become a sell candidate should an irresistible Buy target come along.

What about Persimmon?

houseHousebuilder Persimmon (LSE: PSN) was added to the portfolio for one simple reason — at 618p, it seemed stupidly cheap. Today it’s trading at 1,124p and we’re up 75% accounting for all charges, so I think I was right about the undervaluation. But is all the value out yet?

I don’t think it is. With a forward P/E of 16 for the year to December, the valuation has picked up a lot, sure. But analysts are expecting a 27% rise in earnings per share (EPS) this year and 22% next, and it’s looking increasingly like we’re in for a few years of appreciating house prices again. So I’m happy to rate Persimmon a Hold.

Two recoveries

appleWe bought Apple (NASDAQ:AAPL.US) at $458 per share in January after it missed first-quarter forecasts by a whisker, prompting a sell-off that forced the shares down. They did fall further, but I’ve never been one for trying to pick bottoms, and I wasn’t too bothered.

Since then we’ve seen a seasonal drop in earnings, but the dividend was raised for the quarter ending June, from $2.65 to $3.05 per share to suggest an effective 2.5% yield. And we’ve also seen the shares up again, to $498 as I write. We’re up 4.5% on Apple so far, accounting for costs.

Rio Tinto (LSE: RIO) has also enjoyed a turnaround, gaining 20% since late June as signs of accelerating growth are seen in China. We added Rio to the portfolio a year ago at 3,048p, before subsequent falls. Today it’s at 3,098p, though that’s not quite enough to cover costs. (The other that is still to break even is BP.)

We’ll continue to Hold both of these for the foreseeable future.

Insurance up

The insurance sector has seen some gains of late, and I couldn’t leave this overview without noting that Aviva (LSE: AV) shares have soared 26% to 403p since late June — and we’re up 16% on our entry price of 321p. Forward P/E of 10, expected dividend yield of 4%? Yep, still a strong Hold.

Finally, my idea of the kind of shares that should make up the core of a beginner’s portfolio is the same as my choice for an ISA, or a retirement portfolio — or in fact, any portfolio. I’d start with good strong companies that should stand the test of time and potentially reward you for decades.

Not surprisingly, the Fool’s top analysts think similarly, and they have put together a special report detailing five blue-chip shares that I think would be ideal for anyone at the start of their investing career.

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> Alan does not own any shares mentioned in this article. The Motley Fool owns shares in Tesco and Google.