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What I’d do about the Tesco and Marks & Spencer share prices now

Tesco (LSE: TSCO) bowed to the inevitable this week and the supermarket giant announced Tuesday that it “has ceased new mortgage lending and is actively exploring options to sell its existing mortgage portfolio, including the complete transfer of related balances and ongoing administration of relevant accounts.”

Banking was once seen as a jewel in its crown, along with car sales and overseas expansion (in Asia and the USA), at a time when Tesco’s global march looked unstoppable.

It’s a sobering thought that even Warren Buffett didn’t see the catastrophe ahead, and it’s perhaps ironic that he once said “diversification is protection against ignorance. It makes little sense if you know what you are doing.” In the case of Tesco, it seems, along with many others, he didn’t.

Tempting?

Over 12 months, Tesco shares are down 7%, and there’s still been no sign of the sustained recovery that investors have been awaiting for years. It makes sense for Tesco to retrench and refocus on what it does best, which is selling groceries. So is it time to get back into the shares yet?

I think that’s entirely the wrong question to ask, and the real question should be “what’s the best investment for my next chunk of cash?” regardless of any past favourites. Warren Buffett isn’t sitting and waiting for the moment to get back in. He’s simply moved on, and I doubt he gives Tesco any thought these days other than as a lesson he’s learned.

With little differentiation in the groceries business these days and rapidly increasing competition, Tesco doesn’t get close to my list of top investment candidates.

Transform

Another company I wouldn’t touch right now is Marks and Spencer Group (LSE: MKS). On Wednesday, the hapless high street retailer reported a 9.9% drop in full-year pre-tax profit and cut its dividend by 25% to 13.9p.

Chief executive Steve Rowe said: “We are deep into the first phase of our transformation programme and continue to make good progress restoring the basics and fixing many of the legacy issues we face.” And though M&S seems to have been trying to pull off a transformation for as long as I can remember, this time there are serious things afoot.

The biggie is the company’s joint venture with Ocado, described as a “strategically compelling route to unlock profitable growth for M&S Food.” The funding requires a £600m new rights issue, and it’s being offered at a fairly steep discount — though even after a subsequent fall, the share price, at 243p by close of play Thursday, was still well ahead of the 185p offer price.

Right direction?

I think slashing the dividend was a good move, as one of the “proactive steps taken to strengthen and secure the balance sheet for future growth.” I always shake my head when I see companies struggling with balance sheet problems but stubbornly sticking to paying big dividends.

Steve Rowe impresses me for actually grasping the nettle and making big changes, rather than the half-hearted fiddling around that the company has been doing for ages. But I just don’t have much idea what a reformed M&S is going to look like in a few years time, and until there’s some clarity there, I’m staying away.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.