What You Were Buying Last Week: Tesco PLC

Ontesco2e of Warren Buffett’s famous investing sayings is “be fearful when others are greedy and greedy only when others are fearful” – or, in other words, sell when others are buying and buy when they’re selling.

But we might expect Foolish investors to know that, and looking at what Fools have been buying recently might well provide us with some ideas for good investments.

So, in this series of articles, we’re going to look at what customers of The Motley Fool ShareDealing Service have been buying in the past week or so, and what might have made them decide to do so.

Every second counts

Just when some people were probably thinking “surely things can’t get any worse?” at Tesco (LSE: TSCO), things got worse.

At the end of August Tesco issued a shock profit warning, cutting its profit forecast for the  full year by 15%. The previously advised guidance for its full-year trading profit was £2.8bn — this was now slashed to between £2.4bn and £2.5bn.

But it was worse even than that.  After increasing (or at least maintaining) its dividend for three whole decades, Tesco revealed that it was cutting its precious payout — arguably the last jewel left in its crown — by a swingeing 75%.  

The news was serious enough to merit the accompanying announcement that CEO Philip Clarke was being relieved of his duties with immediate effect, and that Dave Lewis would be arriving from Unilever on Monday morning, taking up the reins a month earlier than planned — more a case of  “every second counts”, perhaps, than “every little helps”.

Things can always get worse

Whilst no-one should still be thinking surely things can’t get any worse?” — they always can — perhaps some people felt that the profit warning, dividend cut and earlier-than-planned arrival of Mr Lewis did represent some sort of turning point for the ailing retailer. If nothing else, the dividend cut alone was a clear admission that urgent and serious action was required, and would now be taken.

So whilst it’s quite possible that things will get still worse before they start getting better — you can’t reverse the fortunes of a supertanker-sized company like Tesco overnight — maybe some people felt that, rather than risk trying to “call the bottom”, now was as good a time as any to get in, before the share price starts going up again. And it was those people who may have put Tesco into the number 1 slot in our latest “Top 10 Buys” list*.

Dave Lewis, who’s now been in charge for just two weeks, definitely has his work cut out. He’ll need to put a completely new strategy in place — one that will protect Tesco from the predations of both discounters like Aldi and Lidl and peers like Sainsbury’s and Morrisons.

A price war can’t be the (only) answer

The dividend cut will give Lewis close to £1bn to play with (perhaps even more if he chooses to close down less-profitable stores and reduce the workforce), but it remains to be seen how he’ll spend it.  No doubt some, perhaps much of it, will go on slashing prices, in a bid to tempt customers back.

But engaging in a price war can’t be the only, or even the main, weapon Lewis employs. Tesco has sunk too low in the market’s estimation for just that. Whilst he probably can’t actually “re-invent” Tesco as a retailer, he definitely needs to do something to rejuvenate its identity.

And it can’t just be a mainly defensive strategy, either — it will need to enable the company to grow again. So perhaps one slightly tarnished silver-lining to the profit-warning cloud is that Lewis now only has to work to beat a lower expectation than before he signed on the dotted line.  And, at the risk of being unduly cynical, increasing the dividend has now been made very much easier, too.

Manage your expectations

No-one should expect Tesco’s share price to rocket. That’s simply not going to happen. Nor will the dividend be back to anywhere near former levels for a long time.  

But if Dave Lewis can implement a solid new strategy — and, crucially, deliver positive results market sentiment towards Tesco, which is pretty much at rock bottom right now, could well start to reverse, slowly driving the share price back to levels last seen three or four years ago. That could make Tesco, at today’s price, a credible long-term investment.

Of course, no matter what anyone else was doing last week, only you can decide if Tesco is a ‘buy’ at the moment.

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Jon Wallis owns shares of Tesco. 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.