Warren Buffett Quotes

Warren Buffett is almost as famous for his quotes and one-liners as for his investing - see this selection of Warren Buffett Quotes on Life

Friday, 20 January 2012

Buffett Buys Tesco Bargain Stocks

Warren Buffett Ups his Stake in Tesco at Knock-Down Price

A Tesco Store in the UK - Tesco has 30% of market share for groceries
Warren Buffett likes to buy and hold stocks for a long time after doing analyzing the bejeebers out of the company. He also likes stocks that have what he calls a 'wide moat' and probably a drawbridge too. He is not interested in short-term fluctuations in prices, except when they are in his favor.

While visiting Japan in November (not something I would do at the moment- given what the ever-resourceful Japanese have now taken to burying radioactive waste from Fukushima in school playgrounds- ENENEWS ), he said the worldwide financial crisis was throwing up opportunities in European equities,
We bought Tesco earlier. I can think of a dozen euro stocks that are attractive … there are stocks I like and wonderful businesses. I could buy more Tesco if the price came down.

All this explains why he increased his stake in UK retail company Tesco - (the biggest supermarket chain in the UK and one of the biggest in the world - they sell everything from avocados and bananas to TVs to broadband services and insurance - and also lots of petrol (gas if you are in the US)). He bought his shares the day after the share price fell almost 20% - so he does take some notice of stock market fluctuations.

Why did the share price fall 20%? Because Tesco reported Christmas sales that were not very inspiring, but Buffett did his analysis and said "OK in that case I'll have $750 million dollars worth please" . He increased his holding from 3.2% to 5.08%.

Tesco 10 Year Chart with 200 day moving average

Tesco 1 Year Chart with 50 and 200 day moving averages

I trust Warren Buffett's fundamental analysis more than I trust my own. However, given the short-term nature of stock trading I believe the stock price might fall back to around 3 UKP - Mr Buffett bought at 3.2. So I'll hang on and see if I can't get them a bit cheaper (they are at the moment 3.3 - but that's still around 15% lower than they were last week). Long-term they look like the proverbial no-brainer, even in these uncertain economic times, - people still have to eat and put gas in their cars, so Tesco is really not a speculative risky share.

Does Tesco have a good product? Yes. Is it generating profits? Yes. Are the profits increasing at an increasing rate? Yes. Does it have cash? Yes. Is management using the cash to generate shareholder value. Yes. Does it have manageable debt? Yes.

As one analyst put it "All you have to do is find a company with a good product, that makes good increasing profits, has ROE of 15%, manageable debt.....and if you hold, and forget about the short term fear and greed shenanigans, your £5,000 may well grow to £5,000,000 before you retire." If you make 24% a year you double your money every 3 years.

Wide-Moat Companies.

What is a wide-moat company?

Companies with wide moats operate in profitable industries and have long-term structural advantages over the competitition. They have predictable earnings, returns on capital that exceed the cost of capital, and long-term staying power.

The odds are pretty good that the actual intrinsic value of a wide moat company will increase over time, and thus improve shareholder value. So time is on your side with these companies. On the other hand if you buy a company without a wide moat, you are gambling that the stock price will move higher just long enough for you to sell it to someone else (also known as the bigger fool theory - selling to someone who knows even less than you do). That's a very difficult game, best played by professionals with access to lots of information - or chartists with a crystal ball.

With Warren Buffett increasing his stake in Tesco we can be pretty sure that he is confident about its long-term future - if you are young enough this might even be a good time for building up a large stake that will grow over time and you could even re-invest the dividends, thus getting the power of compound interest on your side.