Is Warren Buffett Set To Completely Sell Out Of “Huge Mistake” Tesco PLC?

When the world’s most successful stock pickers start to hit the panic button then it’s undoubtedly time for all of us to sit up and take notice.

And soWarren Buffett it was the case this week for squeezed supermarket giant Tesco (LSE: TSCO), with news that billionaire stocks veteran Warren Buffett had slashed his stake in the business, which raised the gloom another notch or two.

The London Stock Exchange announced on Thursday that the Buffett-chaired Berkshire Hathaway had reduced its stake in the supermarket to below 3%, although it failed to disclose what the US company’s holding now stands at.

‘Oracle’ not expecting a miracle

The signs are that Buffett, who has held shares in the business since 2006, is rapidly running out of patience with Tesco’s failure to get its turnaround story on track. Indeed, the ‘Oracle of Omaha’ commented on American news station CNBC earlier this month that investing in Tesco had been a “huge mistake.” Berkshire Hathaway’s stake stood at 3.97% as of the start of the month.

The Cheshunt-headquartered supermarket shocked the market again in late August, when it announced that it had bloated its £1.1bn profit forecast for the second half of the year by a gargantuan £250m. The subsequent fallout has resulted in the suspension eight executives so far, including UK managing director Chris Bush, while the Financial Conduct Authority is running the rule over the firm’s books.

Contrarian trade fails to pay off

But Buffett’s latest sale can hardly be described as a knee-jerk reaction. After all, the businessman hiked his stake in Tesco to a peak of just over 5% in the wake of the firm’s first profit warning for decades in January 2012, outlining his bullishness while the rest of the investment community headed for the lifeboats.

Tesco’s share price has slumped 47% since Buffett’s ill-fated bargain hunt, as the business has failed to get to grips with the relentless march of the budget chains such as Aldi and Lidl, as well as premium outlets like Waitrose. Such paralysis has seen Britain’s largest grocer suffer a 3.8% quarterly drop in market share, down to 28.8% according to latest Kantar Worldpanel statistics, and has resulted in a steady stream of profit warnings in recent times.

A no confidence vote?

As a consequence of these enduring problems, company veteran and chief executive Philip Clarke was left to fall on his sword in July, to be replaced by former President of Personal Care at Unilever, Dave Lewis. Although the appointment had been greeted with optimism by those seeking an injection of fresh ideas, Buffett’s latest stock sale can hardly be viewed as a ringing endorsement for the new man in charge.

Indeed, there are many difficult questions still to be answered at the firm. What does the firm have up its sleeve, other than margin-crushing discounting, to take on the discounters? What does the future hold for embattled chairman Sir Richard Broadbent? And will next week’s interims reveal an even bigger hole that the original £250m profits overstatement?

Given these concerns I would not be surprised to see Buffett pull the plug on Tesco completely.

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Royston Wild 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.