Spread Betting on Tesco: Tesco Rolling Daily
If you are concerned about the economy, you would consider taking a punt on a defensive stock like a food retailer such as Tesco (TSCO). Students of the Tesco Rolling Daily spread bet will have found plenty of opportunities to profit during the last year, and it looks as if Tesco’s involvements in many various markets will continue to provide the active spread betting trader with more in the future. The company experienced some dramatic movements on the announcement of its results in January 2012 and most providers have registered an increase in interest in Tesco for both short and long positions.
‘Just look at supermarket operator Tesco (TSCO). Once a darling of the stock market its growth has dried up as it is squeezed at the premium end of the market by the likes of Marks & Spencer (MKS) and Waitrose and at the discount end by German rivals Aldi and Lidl. Risks were elevated by misguided steps such as a move into the US grocery market and the quality of earnings has declined as it is forced to cut prices to win back market share.’
TSCO is often regarded as a value stock and is prized by long term investors and has traditionally done a very good job of increasing the equity and book value of the company for years. Berkshire Hathaway in fact now owns some 5% of TSCO, and I trust would spend the 20 years taking great care to make good long term decisions, with or without the great Buffett still managing it. Buffett is basically taking the view that over ten years, fifteen, twenty, as far into the future as possible – that Tesco will maintain its place in the world. For TSCO to be priced at it’s current valuation, you’d expect EPS to stay broadly flat in the long term, for a company that returns some 10-20% on every pound of retained earnings. His investment reflects his opinion that it will continue to pay and grow that dividend, and that it will remain a dominant force in UK retailing, many years down the road.
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This is a weekly chart covering the last five years. As a retailer, there are usually cyclic movements of the price, but as always these are not 100% – otherwise the predictability would make everyone a winner! The most obvious cycle for the retail side of the operation is that of Christmas shopping. Despite the fact that Tesco is involved in many operations that do not necessarily respond to that cycle, in all except 2008 you can see an uplift in share price towards the end of each year.
In 2006, Tesco was streets ahead of the main competitors, Sainsburys and Morrisons, in terms of profit level. It was also ahead when it came to diversification into online marketing and in exploiting the loyalty card. As you can see, this was reflected in a rising price which nearly reached £4.80 before the summer slump. TSCO – got lazy and complacent, and took their customers for granted just when their competitors were raising their game. If goods at TSCO are too expensive, their customers will go to other supermarkets like Aldi. TSCO will shrink and Aldi will grow. But, they have the systems, the brain-power, and the funds to get it right.
However, Tesco’s seemed to be overreaching when it expanded aggressively overseas, and the market reacted to this. The company kept chasing growth overseas and market share in the United Kingdom and although its capital base is still solid, profits have stagnated (and actually fallen for the last 4 years). Let’s put this into perspective. Tesco’s used car business has failed, their expansion into Japan has failed and their expansion into the USA is failing. They can’t grow any bigger in the UK because they already have a store on every corner. And their move in the corner shop market was probably a mistake. Transport and distribution isn’t a cash generator for TSCO it’s a liability, and it doesn’t come cheap. Opening lots of small stores meant increasing the size of their fleet of vehicles, increasing the size of their order picking warehouses, lots more admin and warehouse staff to cope with piddly little orders for express stores twice a day.
‘I know it’s fashionable, and very British, to knock a former champion, we see it all the time in every sport. The media and financial institutions, sheeplike, rush to agree and announce the death of a former heavyweight of British industry. Whilst the smart silent ones, wait patiently, aware that the so called ‘death’ is actually a transition and that they are seeing a very, very good buying opportunity.’
The company is also trying diversify and expand into other areas and perhaps oddly they recently announced plans to utilise data from their UK supermarket’s Clubcard loyalty scheme to rate their clients via their new mortgage offering. The new offering made through its subsidiary Tesco Bank aims to use the retail Clubcard loyalty scheme to check whether or not to grant a loan to clients. Despite the fact that a ‘plain vanilla’ provider of essentials, as the initial and core trade of Tesco is, should be shielded from market downturns, as you can see a low point was reached toward the end of 2008. On the positive side, net debt for the company has dropped from £13 billion to £9.8 billion including pension obligations and this decrease in debt demonstrates how good a cash maker Tesco really is. The company just seems to get back to its core business; focusing on quality food and essentials at a competitive price without trying to reach all markets and areas.
For those who like to know the reason for share price movements, which is more of a fundamentalist trait, Tesco’s provides many differing signals. Sainsbury’s is doing better recently, and Amazon has launched a grocery website in direct competition to Tesco’s successful online operation which started in 2000. But all supermarket shares did better in response to the news in June 2010 that VAT was being increased, and Tesco’s are gearing up to capture perhaps 10% of the lucrative telecoms market. So it’s quite possible that the downtrend of the past few months will reverse.
Having said that, all this news really means is that the price is unsettled, as investors and spread betters grapple with all the different aspects of placing a fair value on the shares. From a trading perspective, as opposed to investing, the market includes all available information at any time, sometimes called ‘the market discounts everything’. Technical analysis is used for short term trading, and the news is reflected in the price action.
Looking in greater detail -:
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Now this daily chart is the sort of chart that makes for rewarding trades. You can see many of the reversal points are marked by clear candlestick patterns. A Doji in May and another in July plainly indicated the reversal of the short term downtrends, confirmed by the higher open and close on following days.
Note how the 20 day Relative Strength Indicator picked the bottoms at the same time, including both the minor and major retracements in May. The price movements are a decent size, which more than covers the costs of interest for the rolling daily spread bets, and they largely conform to technical analysis guidelines. Tesco stock is therefore a good stock to spread bet particularly when you consider its low initial margin requirements to open positions.
Trader Opinion
Tesco is currently being priced as if today’s consumer is going to be here forever, never improving, never having money to spend. The current price is saying that despite a 20+ year record to the contrary, the Tesco business model was actually rubbish all along. My view is that, really, Tesco will be just fine. They’ve held up remarkably in this environment, despite British households being on the rocks. On all probabilities, when you have a company with maybe the best earnings growth track record in the UK, a consistently high return on shareholder equity, and business qualities that make it Warren Buffett’s only ever UK holding… coupled with a valuation based on the low-ebb of a typical cycle, and a very respectable yield… That’s a combination I don’t mind buying into for the long term. Even if the economy gets worse, TSCO has the pricing power and is embedded enough to keep going, as 2007-2012 earnings have shown. One for my pension, or the ISA, if I get a price I like 🙂
Trader Rant (sandbank) on Tesco (July 2012)
TSCO: I popped into the TESCO AGM today. Hmm….
The great thing about AGMs is not so much the questions and answers but the opportunity it gives to us ordinary shareholders to eyeball face-to-face the board of directors and the CEO.
The chairman (only 6 months in the job) is Sir Richard Broadbent, an ex-civil servant who seems a bit of a misfit in the rough and tumble of retail. His grey hair is combed forward in a silly fringe. He speaks – mumbles really – so softly it’s hard to hear him. He had to be asked three times to speak up. Understandably perhaps Sir Richard didn’t mention he was on the board of Barclays Bank until September last year ….or if he did mention it I didn’t hear it.
The board comprises a mix of Tesco lifers and revolving-door journeyman directors. Of the 14 directors only 4 are women – funny really in a business where more than 50% of the customers are female. The one I found most amusing was newly-ennobled Dame Lucy Neville-Rolfe (made a dame in the Birthday Honours). When introduced, Dame Lucy half rose awkwardly from her seat as if to acknowledge applause. But applause came there none. The chairman then congratulated her on her elevation and there was a grudging clap and a second self-conscious squirm. All this adulation however didn’t prevent her yawning her head off as the AGM came to an end. The voting revealed that she is the least popular woman on the board.
But the man most people wanted to get the measure of was CEO Philip Clarke. Clarke has only ever worked for Tesco – starting out as a shelf-stacker in Liverpool. Unlike his chairman, Clarke has abandoned his fringe and now combs his hair back. He is short and squat and overweight and, some might fear, is possibly out of his depth.
There are problems in Tesco. It went disastrously into Japan – and had to withdraw. It launched “Fresh and Easy” in the South West USA which is losing money hand over fist. One shareholder- who’d visited a Fresh and Easy store the previous month – pointed out there was a general lack of staff and supervisors. One checkout there had a large amount rung up on the till – but evidently the “customer” had long gone without parting with any cash. But wait, there’s more. There’s also a long-running spat with the American trade unions – some representatives of which were at the AGM – who want to unionise the Fresh and Easy workforce.
As far as the UK is concerned one shareholder complained about rodents running around a Tesco branch in Western Avenue Cardiff. Another shareholder said that in 24 hour store in Sevenoaks there were no checkouts staffed at all in the early morning. Clarke himself admitted that that at 7.30 this morning he’d found shelves not replenished in Culverhouse Cross because of a “lorry breakdown”. And what can we say about the horsemeat scandal – this will surely impact sales.
Clarke also admitted that although Tesco makes a lot of money abroad its recession-hit UK performance and its UK “shopping experience” are in need of major improvement. The UK is now – at last some might think – getting Clarke’s full attention. He’s now spending one day every week on a store floor. Having cut staff to 4.7 staff per 1000 feet (Morrisons ratio is 7) – Tesco is now having to recruit staff again – and train them (again).
Some would say that Japan, the US and last Christmas’s poor performance have all involved Clarke in one way or another. The shareholders have given him the benefit of the doubt for now – but unless things look up soon, the next AGM might be much more challenging for him.
An ex-civil servant with a name like Broadbent on the board is enough to make me want to sell TSCO. Its run more like a holiday camp than a business. When I occasionally attended work at TSCO there was a subsidised canteen, Sky TV, a coffee lounge, free newspapers, free TSCO shares, flexitime, discount off my shopping, a staff social club, nights out, weekends away, and leaflets everywhere telling me how I’m entitled to parental leave, career breaks and 3 months full sick pay, of which I took full advantage. If your 1 hour lunch break was interrupted you were entitled to start the whole break again from the beginning. Smarm would like it there.
The management are too busy socialising to notice they’ve been made a laughing stock of. Their Italian meat balls are called ‘b*****ks of grandad’ And could you imagine Mrs sandbank saying ‘would you like some Donkeys b*****ks for your lunch dear?’
Trader Rant on Tesco (January 2013): They the built the business on the “pile it high and sell it cheap” mantra. As the market has segmented then ASDA/Co-op/MRW are taking the lower end and Waitrose/MKS/SBRY are taking the quality end. TSCO are somewhat stuck in the middle. They will not lose all their customers overnight, but it is hard to see from where any serious business growth will come. In addition, they have built a load of large stores to sell household and electrical items and the internet is taking that business.
Mark Rogers said: I wouldn’t feel too bad about that, I believe Berkshire was buying in 2005!
I think TSCO is the sort of company that can practically run itself at this point, the management will likely follow the same logical choices that most large corporate bodies would make (the effect of having dozens of people in charge, all with the same experiences and business education as all the other executives out there). While the US business may have taken up a lot of management time, the overall underlying business made record breaking results while the share price was falling. I may be wrong, but for the biggest retailing success story in UK history to trade on a no-growth multiple on the basis of the US story was misplaced logic in my view. The last couple of months have gone some way to repairing that.
I’d be interested to know what would’ve happened if the horse meat story had broken prior to Christmas though. Could it have pushed Tesco into the 200s? I can’t help but feel that if it was timed before the re-rating began, Tesco would’ve taken a hit in the share price and presented another opportunity. Goes to show though, rarely do the best times to buy ever seem like it in the eyes of the majority, can be difficult to take that kind of stance!
Trader Rant on Tesco (December 2014): Aldi and Lidi are selling cheaper because they are prepared to operate on much lower margins and have lower costs. From working in the Irish agricultural sector I can tell you that Aldi and Lidl have sourced 90% of their beef and milk from Ireland both north and south. Tesco do likewise but the main difference is Tesco have been buying the lower grade cuts of meat, those from older animals. Aldi and Lidl on the other hand have bargained hard and done deals with the suppliers for higher grade meat but at a lower cost. As for the milk Aldi and Lidl have relied on the quality control systems in place in Ireland so that they can choose any supplier and be guaranteed the quality. I suspect they do the same in the Mediterranean region for the fruit etc
My point being that Tesco lost the ability to do good deals with suppliers instead they just went down the route of buying cheaper poorer quality yet charging top dollar to the consumer. They have used nasty tactics with suppliers that offered short term gains but these tactics are coming back to haunt them. Tesco need to revamp and sharpen up the whole management. Till then the discounters are going to destroy them.
Trader Rant on Tesco (February 2015): I don’t touch bad news, whatever the turn-around story may be. Been there, done that, lost £100Ks over the years. Why put your money at risk trying to buy value when you don’t know what is value? Who the hell knows what this company is worth? Nobody does. If anyone thinks they do they are fools. Tesco’s market is changing, it is going through a sea change. Nobody knows the eventual outcome. I prefer to wait. When they settle, I will check the yield, and the business prospects, and buy then. I am not going to buy now flippantly attaching the label ‘cheap’. I would rather sleep at night. I don’t need to buy at the cheapest price to safeguard capital. In fact, if you try to buy at the bottom, you are more likely to lose money. The little bounce-up you refer to was driven by investors attempting to ‘bottom feed’ and ‘value feed’; it had zero, nothing, zip, nana, to do with a change in the company’s prospects. A typical dead-cat bounce over a few month. I didn’t buy then. I don’t buy now. The news from Tesco HAS to change first NOT the share price. Sitting here pretty because I haven’t got any energy stocks or supermarket stocks. It really is simple. Don’t be tempted when the story – you know – is a bad one.
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