Why Tesco PLC Should Lag The FTSE 100 This Year

tesco2It really doesn’t need any kind of genius to work out why Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) shares have crashed in value this year.

But it’s always worth looking at how badly things have gone to work out when would be a good time to buy in — and there will be a good time, almost certainly.

Since that fateful Christmas trading period of 2011, Tesco shares have fallen 57% to 186p today. And what started out looking like a one-off bad Christmas turned into a series of profits warnings and other problems, culminating in the admission that the company had overstated its first-half profits this year by around £250m.

Buffett says he was wrong

Just a week or so ago, ace investor Warren Buffett was moved to say “I made a mistake on Tesco. That was a huge mistake by me.” In the past year alone, Buffett’s investment vehicle Berkshire Hathaway had lost around £645m on Tesco shares, as the price crashed to levels not seen since 2003.

And rather than recovering, the price fall has accelerated this year. Since the start of 2014, it’s down 47%, making the FTSE 100‘s loss of 4.7% look like party time for the bulls by comparison.

But interestingly, since the price bottomed out on 6 October at 168p, it’s blipped back up a little — as I write it’s actually 11% higher than that! Now, we’ve had that kind of thing happen plenty of times before only for the price to almost immediately resume its slide, but one of these days it really will reach the bottom.

Valuation too low now?

The dividend has been slashed and there’s a fall in earnings per share of nearly 40% forecast for the year to February 2015. But that puts the shares on a forward P/E of only about 9.5 — way below the long-term FTSE average of 14.

And while brokers urging us to Sell the shares outnumber the Buys by four to one, there are vastly more sitting on a Hold recommendation right now.

There’s a new boss at the helm who seems determined to root out bad practices and fix the ills that afflict the company, and pessimism might finally have hit an all-time low.

Time to buy?

In a few years time I think we could well be looking back at late 2014 as the best time to have bought back into Tesco. But there are less risky things to be doing with our money right now, and I’m amongst the Hold crowd — either hold or hold off for now.

I’d at least wait until first-half results are released on 23 October.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.