Do Tesco shares actually represent a big buying opportunity?

25th September 2014

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Given the troubles Tesco is facing the market consensus on the shares may well be in ‘sell’ territory but a number of contrarian investors are seeing value in the embattled supermarket giant.

This week the UK’s largest retailer admitted that it had wildly overestimated its half-year profits, by a staggering £250m. An investigation, headed up Deloitte alongside law firm Freshfields was swiftly launched and the suspension of a number of senior executives followed.

Parliamentary Business Committee chairman Adrian Bailey, said Tesco’s error was “stratospheric” and the debacle could mean that the retailer will appearing in front of MPs. Driven by the latest development, the group has announced that Alan Stewart will join the board as Chief Financial Officer with effect from 23 September, rather than the previously announced date of 1 December 2014.

While the supermarket stalwart, and its chief competitors, are already feeling the pressure on the back of far tougher competition from the likes of Lidl and Aldi, this latest development has walloped Tesco’s already battered share price.

Over the past week alone the FTSE 100 constituent’s stock is down by 13%, and over three and 12 months it has plummeted by 33% and 48% respectively.

Jonathan Jackson, head of equities at Killik & Co notes the latest industry figures from research group Kantar make for grim reading. He said: “For the 12 weeks ended 14 September, the group’s market share fell to 28.8%, from 30.2% for the same period a year ago. The figures also showed that the overall grocery market is currently growing by just 0.3%, the lowest level since our market data was first compiled in 1993.”

But while Tesco maybe in trouble it is still the UK’s largest supermarket with a very large market share and Sports Direct owner Mike Ashley is clearly bullish on the group’s prospects, as he has entered a 23m share put option agreement.

Richard Hunter, head of equities, at broker Hargreaves Lansdown says: “Private investors have also seen an opportunity given Tesco’s latest woes. Clearly of the impression that this week’s fall may have gone too far, a whopping 92% of our Tesco trades this week have been buys, with almost 30 times the daily average deals of the previous week.”

According to Digital Look, notably this week analysts at Citigroup, Nomura and Deutsche all reiterated ‘hold’/’neutral’ recommendations on the shares.

“Often one of the best times to buy shares is shortly after a big fall and we have seen a big slide from Tesco. Of course this strategy doesn’t always work: investors in the banks at the start of the financial crisis will still be smarting,” adds Hunter.

 

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