Halloween Horror Story: Terror At Tesco PLC As Buffett Is Selling!

We all know the scariest stories are true stories, so gather ’round kiddies as I tell a tale of investing horror that will haunt your dreams and send shivers through your portfolio.

Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) seems to be one of those Marmite shares, even within the Fool offices. Nobody can agree whether it is a long-term hold with a great dividend and a newly refocused structure, or a behemoth that has come to the end of any meaningful returns for investors.

I have been in the former camp since July 2011, and it has been a pretty unsettling ride so far. The fresh optimism brought on by the start of a shiny new year in 2012 was ripped apart by a 20% drop over the first couple of weeks. As was widely known, Warren Buffett had been an admirer of Tesco for some time, owning shares since at least as far back as 2007, and his topping up in November 2011 eased my frayed nerves on the grocer’s fortunes.

When that early 2012 dip happened, I was again safely harboured in the comforting arms of Uncle Warren who was saying everything was going to be okay. Tesco’s slide was precipitated by their first profit warning for over 20 years and, rather than running for the hills, Buffett helped himself to some more to bring his holding to over 5% of the company. (Indeed, we have detailed free report on Buffett’s interest in the business. Just click here to take a look.)

Since then it has been a story of disappointment and despair for shareholders, with only the dividend (still yielding 4%) as any real consolation for beleaguered shareholders. The sale of the Fresh and Easy chain signalled surrender in the US, and re-organisation in China put a lot of pressure on European operations that have so far not delivered.

To make matters worse now Buffett has sold part of his holding..! We can argue all we like about his motivations, but one thing is clear: he does not have the faith in Tesco right now to hold on to those shares.  

When the world’s greatest individual investor’s money talks, it’s time to listen. Me, I’m beginning to think the doubters were right all along and that maybe — whisper it quietly — Buffett might have missed out this time.

Should I get out now while i have only taken a bit of a mauling and look for some new ideas like the Fool’s top growth share? Maybe, and I’m not sure my nerves can take it much longer.  Earnings per share growth is expected to be low or even negative for the next couple of years, and prices still feel high in comparison, even though the price-to-earnings ratio is hovering around 10 or 11 times.  The assets are in a strong position and Tesco is a healthy company so I could be wrong, but I may well be escaping from this horror story — and sharpish.

> Both Barry and The Motley Fool own shares in Tesco.