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The Beginners’ Portfolio Dumps Tesco PLC!

This article is the latest in a series that aims to help novice investors with the stock market. To enjoy past articles in the series, please visit our full archive.

The Beginners’ Portfolio is a virtual portfolio, with all costs, spreads and dividends accounted for. Transactions are for educational purposes only and do not constitute advice to buy or sell.

One of the most important lessons to learn in investment is that when one of your holdings materially changes in some way, you should re-evaluate it from scratch — and if you wouldn’t buy it now, then seriously consider selling. The trouble is, it can be really quite hard to fully grasp the extent of problems that can befall our carefully-chosen companies, and we can easily carry on seeing them in too favourable a light.

That’s what I did with Tesco (LSE:TSCO), which I added to the portfolio back in May 2012 at a price of 305.5p. When the problems started to emerge and the share price fell, I thought I saw it clearly — but I thought the troubles were already adequately covered by the share price fall and nothing worse was going to happen.

It got worse!

Of course, worse things did happen, and kept on happening, yet each time I convinced  myself that the worst was over and that it made sense to hang on to the shares for the inevitable recovery. What I’d done was failed to forget my previous opinions about Tesco and start my research from scratch again. I still had the good old Tesco in my mind, the one that wasn’t scared to venture into new businesses and which had made impressive inroads into overseas markets.

But that Tesco was gone, and the new one was failing to match the upstart competition that was coming in the shape of Lidl and Aldi. Not only were these foreign interlopers selling weird brands at much lower prices — the stuff behind the unfamiliar labels was actually good, and often better than Tesco’s better-known alternatives.

Back when I picked Tesco, my local branch was always crowded and the nearby Aldi never was. Today the situation is reversed.

Wouldn’t buy now

If I was looking to invest now, I’d conclude that Tesco shares are overpriced on an expected P/E of 22 for the year just ended in February, dropping only to 16.5 based on 2016 forecasts. That’s still significantly above the FTSE average, and with the slashed dividend set to yield only 1.5% by 2016 and with more years of intense price competition ahead of us, I simply wouldn’t buy Tesco now.

That means it’s time to rectify my mistake and sell, and Tesco has been duly dumped from the Beginners’ Portfolio — but at least the share price has recovered a bit in recent months and I didn’t ditch at the bottom. The decision was made on Friday the 13th, and I would have realised 232p per share selling mid-afternoon that day.

How much cash?

After all costs, that would raise £358.88, for a 28% loss. What to do with the cash is a question I’ll enjoy considering in the coming weeks.

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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.