The Great Tesco Turnaround?

By Zak Mir

The aftermath of the financial crisis has seen many of the rules regarding both companies and markets rewritten in quite a painful way, and this seems to be very much an ongoing process. After all, in the wake of the latest HSBC/Swiss tax debacle, anyone hoping that the banking sector might be rehabilitated both financially or even morally will have been left somewhat disappointed.

From a personal perspective though, it may be that the story of Tesco during the past three years is actually one which both from a trading and investment perspective can really be the game changer. This is because one would always have suspected that companies involved in banking or investments would attract cyclical risk. While the scandals involving PPI or Libor will have raised more than an eyebrow or two when they struck, it can be argued that the £263 million accounting issue at Tesco really was the equivalent of drawing a moustache on the face of the Mona Lisa.

Here we were dealing with an institution regarded by many as the equivalent of a National Treasure, holding up the reputation of the UK stock market around the world. In the wake of this incident it would be difficult not to ask the question: is nothing sacred?

Ironically, this is probably the same question, but we could veer towards Tesco’s relationship with the world’s greatest investor. Warren Buffett’s mistake with the UK supermarket was to regard it as being able to walk on water, not realising that he was paying a premium price for a company that for at least a decade had on a fundamental basis been in possession of the Emperor’s New Clothes.

But perhaps from my standpoint as someone who actually listened to the intentions of people in terms of backing Tesco since the first profits warning in January 2012, it was the stated aim of this crowd of bargain hunters to buy the dips all the way down from 400p to below 200p which was really the most telling.

What really stuck in the mind was the confidence with which these bottom fishers felt that buying into the supermarket would eventually reap long-term gains. Or at least, the stock was worth buying for the dividend. While we might hope that such ideas are correct, the stock market is littered with examples of companies which go ex-growth, or simply lose their edge. For example, there are not that many companies in the FTSE 100 today that were in it in the ’80s or ’90s.

However, it may not be appropriate to go too heavily for the gloom and doom approach with Tesco in 2015. There has been a period of severe adjustment under Dave “Drastic” Lewis. It is to be suspected that the best he can do is to halt the decline at the group in relative but not absolute terms. This is unless Tesco can become as cutting edge in the 2010’s as it was in the 1980’s when it was an the equivalent of an Aldi or a Lidl in the marketplace of the time.

From a technician’s point of view it is difficult not to be heartened by this week’s recovery of the key 200 day moving average at 233p, a key trend changing piece of price action from bear to bull if it can be maintained. This coincides with the latest news of the first sales growth in a year, and a possible buyer for Tesco Lotus in Thailand. So at least for now the technicals and fundamentals look to be turning up at the same time. (For a look at the fundamentals, click HERE.)