Tesco: Woodford vs Buffett

Published in Investing on 17 February 2012

One sells, one buys. But which master investor has made the correct decision?

They do say it takes both a buyer and a seller to make a market.

Well, this week it's transpired that Neil Woodford has effectively sold his shares in Tesco (LSE: TSCO) to Warren Buffett.

Now, I don't know about you, but I can't recall any other time when two such master investors were apparently at the opposite ends of the same trade. In sporting terms, the transaction might even be the equivalent of Ali-Frazier, Borg-McEnroe or Senna-Prost. Two greats, but only one can come out on top -- at least with this particular Tesco decision!

For us ordinary investors, it will be fascinating to discover which of these super stock-pickers has made the correct portfolio move.

Tesco warning

This bout of guru Tesco trading was, of course, triggered by the supermarket admitting near-term profit growth would be minimal and the shares slumping by 16%.

As you'd expect, the debate about buying and selling Tesco soon raged on the Fool. Bulls cited Tesco's market leadership, tip-top dividend record and lowly valuation, while the bears responded with poor customer service, recent management changes, plus how J Sainsbury (LSE: SBRY) fell from grace during the 1990s and then struggled to recapture its former glory.

According to an interview with Mark Dampier of Hargreaves Lansdown (LSE: HL), Mr Woodford said he was able to offload his Tesco shares quickly because Mr Buffett was buying. Explaining his sale, Mr Woodford believed the supermarket currently "has too many plates spinning" and reckoned restructuring its UK business would be difficult due to heightened sector competition.

Woodford sells...

My research indicates Mr Woodford owned about 167 million Tesco shares before the sale, which at the time represented about 3.4% of his market-thumping Invesco Perpetual Income and High Income funds. However, Mr Woodford's 2011 reports did show him selling some Tesco shares last year and reducing his position down from 4%.

Looking further back, it seems Mr Woodford acquired most of his Tesco stake during the first half of 2004, when the price traded between 237p and 270p and averaged 252p. Including a possible 81p per share of dividends collected on the way, I reckon Mr Woodford may have enjoyed a possible 59% total return on his main Tesco investment (assuming he bought at 252p, received dividends of 81p and sold at a post-warning price of 320p).

...while Buffett buys

On the other hand, Mr Buffett has now accumulated 508 million Tesco shares, which represent about 5% of the supermarket and roughly 1.5% of the common-stock portfolio within his Berkshire Hathaway (NYSE: BRK-B.US) conglomerate.

Mr Buffett was a little slower than Mr Woodford to latch on to Tesco -- the American billionaire first disclosed a sizeable interest during 2006, and I've deduced from Mr Buffett's reports that he may initially have paid 333p per share. Including 71p per share of possible dividends received as well, it seems he's currently made a 26% total return -- at least on his maiden purchase of 230 million Tesco shares.

So what now?

So who will eventually be seen as the wiser Tesco investor? I must admit, it is very difficult to say.

Certainly, Mr Woodford and Mr Buffett have similar 'value' styles, with both men avoiding the late 1990s tech bubble to instead buy old-economy businesses such as tobacco (Woodford) and utilities (Buffett). Indeed, since the turn of the century, both Mr Woodford and Mr Buffett have trounced the 'lost decade', with the former's Invesco funds generating a 180% total return and the latter's Berkshire conglomerate delivering 114% (or 119% in sterling terms).

But perhaps Mr Woodford does have the better track record with British shares. As most Buffettologists know, the American billionaire has made only a handful of non-US stock investments, with British purchases before Tesco limited to just Guinness -- now Diageo (LSE: DGE) -- and Allied Domecq in the 1990s. What's more, I do wonder if Mr Woodford's local knowledge -- and the opportunity to 'scuttlebutt' the supermarket's service -- puts him at an advantage over his Nebraska-based rival.

Still, the final verdict on this Tesco transaction will take some time to play out and may never really become clear cut. Indeed, Mr Buffett's Tesco shares could do well from here, but Mr Woodford may have recycled the proceeds into an even stronger performer! For what it's worth, I'm predicting this sort of 'score draw' between the two super investors, though if I had to side with one of the gurus, I'd have to go with Mr Woodford and the possibility that Tesco's fresh management may take a while to reinvigorate the retailer.

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Comments

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Cheapside 17 Feb 2012 , 12:45pm

Could it be short as against long term views?

ukvalueinvestor 17 Feb 2012 , 12:53pm

I think they just have different time horizons. Buffett prefers to hold 'forever' so I guess he's not so bothered about the entry price, although lower is always better of course. Woodford's running a fund that doesn't have Buffett's 100 year horizon so medium-term trading is more appropriate.

There isn't a right or wrong decision though because you can't know how Woodford's next investment will work out compared to Tesco, but if I had to get off the fence then I think Tesco is still well worth the money at the current price and I certainly wouldn't be selling.

progressivefool 17 Feb 2012 , 1:10pm

Mr Woodford has been good to me of late, firstly he sold £250M of Northumbrian Water this time last year giving me a great price 6m before it was bought out and now selling up in Tesco dropping the price down to sub 320p :)

richjfool 17 Feb 2012 , 1:12pm

It may also depend on what price was paid for the shares. It may have worked for both of them, as they apparently had different objectives. Assuming NW sold stock before the fall or at some intermediate price and took some profits, and WB was able to add to his holding more cheaply.

GoldenSoldier 17 Feb 2012 , 1:17pm

I suspect Woodford is right. He probably thinks that the future is bleak with the present management in control. I visited my local Tesco store yesterday. The queues were even longer than normal, and the staff were frustrated by the lack of action from Philip Clarke et al.

Perhaps Buffet's long term view assumes a change of management.

GoldenSoldier 17 Feb 2012 , 1:20pm

I should add that about half the check outs were unmanned.

amsterdamgroove 17 Feb 2012 , 1:43pm

GoldenSoldier, shouldn't Buffet be more concerned if there were lots of manned check-outs with no queues?

jinky33 17 Feb 2012 , 1:49pm

Buffet "Not so bothered about entry price" entry price is everything in investing, without that your throwing darts in the dark.

SevenPillars 17 Feb 2012 , 2:19pm

Tesco is just unloved by the market at the moment, these things happen. It's P/E is now is around 9 against an average of 18 for the FTSE 100, despite the fact that it is still increasing profits by substantial amounts each year despite austerity. Woodford suggests that it has its fingers in too many pies at the moment, perhaps he would like to answer how a company with approximately 30% of its home market cannot? It is expanding quickly overseas to get away from this reliance on its UK market. Seems sensible to me, but the clever market doesn't seem to like it for some reason. Probably because they have some big shorts on.

For those of you who want to take the doom and gloom approach I say one thing. £4billion profit within 3 years. Buffet is right, Tesco is cheap.

salmo365 17 Feb 2012 , 2:20pm

The fact that Woodford is local probably means he has a better chance.

Its a shame. I'm a shareholder who used to shop at Tescos but have switched to Sainsburys. I should switch my shares as well but I hate to sell at this price.

DashingDave123 17 Feb 2012 , 2:21pm

Looking at the brokers' estimates for Tesco the future growth rate is 5.2% while the implied P/E is 9.5 which is almost twice as much as the growth rate justifies. The proper price for TSCO is about 175 so it is still over-priced at 320 even after the recent fall. It has been sustained at a high value by the prestige of Leahy and the prospect of overseas expansion. Now Leahy has retired and the expansion has encountered difficulties I expect the price to continue falling to 175. No company grows for ever. They all have a cycle and TSCO is a mature company, past its peak.

tophernator 17 Feb 2012 , 2:23pm

GoldenSoldier; I've never heard checkout staff discussing strategic investments and global positioning. Where is your local Tesco, and how did they recruit such economics experts to scan barcodes?

apprenticeDRL 17 Feb 2012 , 2:25pm

I bought Tesco when they dropped as a contrarian play. I had them on my watch list for ages (nearly bought at when they dropped to 360 last year but another opportunity was more tempting and they rallied). This time I bought in when they dropped to 325 so still down a bit, but I have them as a value share and intend to hold for the long run. At the end of the day they also give international exposure not just UK and are profitable so I am happy with the purchase.

leftandright 17 Feb 2012 , 2:36pm

Maybe they are both wrong and the price is going nowhere.

gdb0 17 Feb 2012 , 2:42pm

I think Maynard may have inadvertently explained the difference between the perspectives of Woodford and Buffett when he said that Woodford has a better track record on BRITISH shares.

For the past few years, the real engine for growth in Tesco's business has been its international expansion which is presumably what Buffett is investing in. It's true that this has been funded in part by the cashcow of its 30%+ UK market share, and the recent statement simply stated that there would be little profit GROWTH in the next couple of years. So, in my view provided Tesco can retain a reasonably stable market share in the UK, albeit with reduced margins, then the long-term value investor (Buffett) with an eye on the international business, may well come out on top.

On the other hand, as Maynard pointed out, Woodford has made a reasonable return on his investment and may well just believe that his UK focussed funds can secure better short to medium term returns by switching now.

DashingDave123 17 Feb 2012 , 2:47pm

Does Warren Buffett really have a long term horizon at age 81? How long does he expect to live?

rouge14 17 Feb 2012 , 2:51pm

Buffetts mantra, well one of them.
"Buy when others are fearful....."
Ive been after Tesco for ages and have been waiting for an entry opportunity.
This discussion shows it is at least an opportunity.
Whether a good or bad remains to be seen.
Dont forget even NW and WB are only human and still bleed blood or whatever the saying is!

Benatar 17 Feb 2012 , 2:57pm

"Only one can come out on top" - not so, It depends on the objectives of each transaction.

If Buffett's objective is to get an annual income of 5% & steady growth over 5 years plus; and Woodford's objectives is to maximise his return spver the next 3 months, they may both be equally successful.

Dozey1 17 Feb 2012 , 4:39pm

The dividend looks safe - a good income share IMHO.

DunFooling 17 Feb 2012 , 4:43pm

Looking at TSCO in my normal (admittedly simplistic way), the shares seem VERY cheap, (36.11 EPS/ 6.5% = £5.55) so I can’t see why anyone would voluntarily crystallise a capital gain unless they had a MUCH better use for the funds somewhere else!

Excel35 17 Feb 2012 , 4:49pm

@DashingDave123 at what age should people stop thinking long term? Those that change there thinking like that are the ones most likely to clock out sooner too. Or at least lose there marbles sooner. ((Damn, hope Buffet hasnt lost his))

@ukvalueinvestor Buffet not bothered about the entry price?


Overall it is a bit disappointing to find out Woodford is selling Tesco at this low price.

Personally I like the stock, if it does go nowhere for a few years Ill pick up the dividend and just wait until the results and sentiments improve. Hopefully the dividend grows in the meantime.

Whichever way it goes it will be a learning experience. Seems to me the vast majority of people are down on supermarkets in general, forecasting them suffering to internet competition etc etc. For me this is the best time to buy.

Must admit my Tsco holding is a little heavy in my portfolio, but of it wasnt Id have MRW which always looked a bit more expensive.

sageofyork 17 Feb 2012 , 4:54pm

I think Woodford is right in this case, Philip Clarke is a Tesco timeserver not an entrepreneur like McLaurin who Lehey followed. I think Tesco will continue to go down until there is a major shake up of the exec directors and some new thrusters put in place..

DashingDave123 17 Feb 2012 , 5:28pm

Exelc35, US life expectancy statistics show that a white male of 81 can expect to live for another 7 years on average. Obviously this is only an average and an individual could do anything from keeling over tomorrow to living to 100, but neither is likely and the most probable thing is to carry on to about 88. I would think WB would want some useful result within 5 years or less and what happens after 10, 15 or 20 years is becoming academic.

Incidentally, since Jan 2008 Berkshire Hathaway A has lost 15.2% as against a loss of only 6.1% for the S&P500. Time to call time on WB adulation?

jaizan 17 Feb 2012 , 6:43pm

I'm going to back Mr Woodford on this one.

He's better placed to understand how Tesco service is deteriorating & driving customers away.

That may also explain his superior record with UK investments.

spyknife 17 Feb 2012 , 7:05pm

I bought at 317p a couple of days ago but now I am feeling paranoid.
Not because I have no faith in Tesco as a business but because of Greece ! Greece looks more and more likely to default.
and when it does it will drag every stock down by 20-25%.
Problems in the economy may be temporarily forgotten but they are not solved !

ANuvver 17 Feb 2012 , 8:03pm

Ahold has done nicely for me, and I'm still aholding.

spyknife:
I suspect a Greek default will be prove to be more a whimper than a bang.

Which reminds me of a quote attributed to jazz saxist Paul Desmond. Contemplating the notion that beautiful women would happily slum around with artists and musicians for a while, but always seemed to wind up living in penthouses overlooking the park, he commented: "This the way the girl ends. Not with a whim, but a banker."

mortimer65 17 Feb 2012 , 9:13pm

they had lost their way a bit but i can tell you their 5pds off 40 plus 10p off petrol is pulling them in again

77ss 17 Feb 2012 , 9:27pm

'this week it's transpired that....'?

A couple of weeks behind the curve there!

pbrammer 18 Feb 2012 , 9:14am
star517 18 Feb 2012 , 12:00pm

Tesco may well fall out of favour with UK shoppers and even UK investors. But it's still well-poised to expand into emerging markets.

ngata 18 Feb 2012 , 3:27pm

What Woodford might know, but some of you (including Buffet) not know yet because of D notices, is that Tesco is in the middle of its Ratners' moment.

It has (amongst those who know the facts) come to light that Tesco, was prepared to take free slave labour from dying cancer victims, stroke victims, handicapped people, mentally ill people, disabled people, forcibly sent to it by the DWP under its obscene, Nazi style plan.

Today the firm has gone into reverse but it is too late. A store has been occupied in Westminster, it is frantically trying to get the DWP to come up with a new final solution,but once the full details become public (and it will trickle out over the week ahead), thousands upon thousands of its former customers will never to shop there again.

I wouldn't buy into Tesco (or at Tesco either) at any price. Shop at Sainsburys. They refused the DWP.

KeyLifeSkills 18 Feb 2012 , 11:34pm

Hello everyone,

An interesting debate.
ngata:
Just out of interest, are you shorting Tesco & do you own Sains?

Personally, I sold my original holding of Tesco in Nov & made a good profit. Since the dip, I have been trading it as a yo, yo share & have done well from it so far. I bought back in a few days ago at 3.14.

Although I think Tesco have rightly been shown up over the DWP saga (& that probably had a lot to do with the share price falling on Fri), I use some of my profits to fund the free workshops I run in schools. So, just like the profits I made from Barc & recently LLoyds - I get a kick out of knowing that "greedy" Companies are indirectly funding my Life Skills workshops.
....Now if I could just come up with a way of getting something back from greedy MPs...!!

goodlifer 19 Feb 2012 , 10:15am

Benatar

"Only one can come out on top" - not so, It depends on the objectives of each transaction.

If Buffett's objective is to get an annual income of 5% & steady growth over 5 years plus; and Woodford's objectives is to maximise his return spver the next 3 months, they may both be equally successful."

You're absolutely right.

An awful lot of Foolish argument arises because we wrongly assume we all have identical objectives.

ngata 19 Feb 2012 , 10:50am

KeyLifeSkills,

I have a small holding (3K shares) in Sainsburys - I sold out of them at 395 a year or so ago to take profits, but bought them back recently when they fell below 290.

No, I am not shorting Tescos. I don't like shorting, though I admit that the professional shorters manage to create an additional amount of volatility that I profit from. I don't like Tescos much either, but that probably comes from remembering the 5p cemetery scandal, and her Ladyship doesn't have much to do with it anymore.

I agree with you that there has to be a good recovery play with the banks you mention.



GoldenSoldier 19 Feb 2012 , 12:28pm


Tobernator

Whatever makes you think the staff were discussing investment strategy? How absurd.

They were frustrated by the refusal of management to respond to their pleas for more staff. They were embarrassed by the length of the queues and the complaints by customers.

Illiswilgig 19 Feb 2012 , 1:31pm

"What's more, I do wonder if Mr Woodford's local knowledge -- and the opportunity to 'scuttlebutt' the supermarket's service -- puts him at an advantage over his Nebraska-based rival."

first I've heard that Woodford is living in California these days? Or perhaps Korea, Thailand or China?

Growth in these markets will be the engine of Tesco future growth, not the UK. I hope that all of the hysteria doesn't persuade Tesco to spend too much to gain too little in the UK or take their eye off the ball abroad - though Tesco record here is superb so no evidence that this will happen. I shall sit back, relax and wait for the increased divi....

Good article, keep them rolling?

cheers

Mark

KeyLifeSkills 19 Feb 2012 , 6:31pm

Evening all,
lovely to see the sun shining today.

Hi ngata,

Thanks for your reply. Good to hear your trading of Sainsburys has paid off so far & long may it continue. I have both Sainsburys & Morrisons on my watch list but for now, I think volitility favours Tesco more than the other two. Given this, I plan to trade its range for the foreseeable future but to make sure I'm holding it for it's dividend in April.

Most retail analysts seem to prefer Morrisons out of the 3 but I noticed Sainsburys had a good run last week & recovered most of its previous weeks losses.

Take care

eccyman 20 Feb 2012 , 10:36pm

My money's on Woodford - literally.

He can simply pop into a Tesco store and see what the rest of us see.

The Woodford vs Buffet debate, it's like a crocodile vs a lion. The winner depends on the environment.

milldoo2311 21 Feb 2012 , 1:53pm

when you work for this type of company lets say mr woodford has been very wise iam with you eccyman

ANuvver 23 Feb 2012 , 3:41am

"Woodford's objective is to maximise his return over the next 3 months"

AFAIK he's not known as a short-term player...

billyboy121 23 Feb 2012 , 2:18pm

ngata said

'It has (amongst those who know the facts) come to light that Tesco, was prepared to take free slave labour from dying cancer victims, stroke victims, handicapped people, mentally ill people, disabled people, forcibly sent to it by the DWP under its obscene, Nazi style plan. '

What brilliantly wild and fantastical language. I heard a similarly ethused Owen Jones on the 10 o'clock show last night holding forth about how the government should be creating real jobs rather than participating in schemes creating fake jobs, that Tesco is raking in millions of pounds a day, etc etc etc.

His passion and commitment were obvious and indisputable, but as he talked so also was his lack of knowledge and understanding of either how capitalism or the read world actually work.

Presumably never having had a job in the real world since leaving Oxford University (don't tell me author or researcher for parliament or the unions count in that category) has deprived him of the education that the real world actually gives and of how difficult it can be to find a job even in the good times.

Returning to the point, this scheme could in theory give unemployed young people an opportunity to gain valuable work experience. Yes, it's free for Tescos and other retailers involved. Yes having free labour will increase their margins. But to pretend that governments could otherwise get people work experience and away from a dole mentality than by incentivising them on a financial level is just wishful thinking - capitalism doesn't work like that.

To pretend that this scheme is anything like the Nazi Organization Todt is ignorant, childish and insulting to the memory of those people who were forced into working themselves to death in brutal conditions under the Nazis.

We all wish we were not in the economic situation that we are currently in, but the reality is that things are not great, and if this scheme helps people into work and gives them a sense of purpose and place in society rather than just signing on week after week, then why not. It's 8 weeks for goodness sake.

On that basis, this is bad PR - but it will blow over. The issue here is what Tesco does in the UK to improve its situation and how the overseas operations pan out, particularly in terms of competition from other big international retail players.

ANuvver 24 Feb 2012 , 3:39am

Well said bb.

For a minute there I thought I'd browsed into the Guardian's Shrieking is Free by mistake.

GoldenSoldier 24 Feb 2012 , 7:06pm

Anuvver time, anuvver day. I don't know why those words echo in my mind. It has got nothing whatsoever to do with the topic.Perhaps its just because I noticed the time of your post, ANuvver.

motivefinder 25 Feb 2012 , 11:09am

yes billy, some people thinks, it is fair for a hardworking family to pay their council house rent of £2000 per week in some areas of london, when that family strugling to maintain their day to day living.

how long , govt can provide these dole luxary , borrowing money, that is unsustainable. things need to be changed and govt. should be proactive than reactive.

how unfair it is --- I being a lazy sod, being on dole ,find it disgracefull to do cleaners job, but I expect, some other cleaners, will provide my dole money from their tax.

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