SIF Folio: Why Tesco Could Be A Good Defensive Buy

24th Jul '18 by Roland Head

10 comments 4484 reads

This hot, dry weather appears to be affecting my stock market activities, which have also dried up. Just 11 stocks qualify for my SIF screen. And almost 40% of the SIF fantasy fund is now held in cash. The part of my personal portfolio which mirrors the SIF is also running an unusually high cash balance.

I don’t have a problem with this in principle. I’ve written before about my hope that when the market looks overvalued, the SIF screen will detect the warnings signs and move progressively into cash.

So far in 2018, this hasn’t happened. I’ve added 14 stocks to the portfolio and sold 14. But new buying opportunities have become fewer recently, so the next couple of months could see a more decisive shift to cash.

In any case, I’m in no rush to buy stocks, as I think that much of the market is fully priced. What I would welcome is the chance to pick up a couple of defensive dividend payers at sensible valuations. My exposure to defensive companies is pretty minimal at the moment:

Because of this, I was interested to see that Tesco now qualifies for the relaxed version of my stock screen. (This is a fork of my main screen that accepts stocks with slightly more demanding valuations, as long as they satisfy all of my other rules.)

As the UK’s largest supermarket, Tesco could provide an attractive defensive backstop and a growing dividend income. The shares aren’t obviously cheap, but both the share price and the business appear to be performing well. Stockopedia also likes the shares, awarding them a StockRank of 81. So I thought it would be interesting to take a look at both this week in order to get a better understanding of what’s on offer.

Value lies in the future

Tesco shares are delivering almost indecent levels of earnings growth at the moment. Last year saw headline earnings climb 62.7% to 11.88p per share, as the group’s recovery continued. Further progress is expected this year, some of which has already been priced into the stock. All of this means that value isn’t the stock’s strongest suit:

The shares may look pricey, but I don’t think there’s nothing obviously wrong here. One attraction for me is that earnings and free cash…

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ddinksdadd

25th Jul '18

Hi Roland,

I follow your musings here quite closely, I'm always a bit disappointed on your behalf at the lack of interested comment from the stockopedia readership as i think what you are doing is using the site as was intended to discover interesting investment opportunities. i think you do it well!!

I like the way you 'get behind the numbers' and this article has for me just re-inforced what a great metric the F-Score really is ! As you point out it tends to reveal trends as opposed to bland averages, which as you point out here regards Tesco (LON:TSCO) can be quite mis-leading. What has become apparent to me over my time investing is that Mr market seems to reward investors who spot companies who's fortunes are improving rather than sustaining. Tesco is a great example of this where its economic fortunes hit rock bottom in 2015, yet it was 2017 roughly before you saw a 'higher low' on the longer term chart ( indicative of a new uptrend). Thus plays out the famous 'bowl' chart which usually makes a good buy! An obvious point here is that the low spot economically is usually a good while before the chart low spot, giving investor an opportunity to joint the party before the drinks cabinet gets locked up! (To misquote Alan Greenspan!)

It would be interesting to see if a way could be found to identify stocks reaching a 'tipping point' on a return to favour, somehow I think the F-Score should find itself included in this method (should it be possible to formulate a 'method'). I think once a company has been identified as returning to favour then the beaten up nature of the price and possibly the yield (divi) should provide some comfort in times like this when valuations vs future growth are generally looking a bit strained, as in like the current situation.

Anyways apologies, I know this isn't strictly what SIF is all about but i like your systematic approach so wondered what your thoughts might be on using your analytical method to tapping into the field of 'returning to favour' stocks.

Regards

Jim

Howard Adams

Hi Roland

I just want to add my voice to Jim's above.

I read your post with interest every time and value the research you are documenting and the way you illustrate how you use/interpret Stockopedia.

I do not know why more do not offer comments.

As a suggestion I think you could, on occasions, add into a title of a peice your annualised returns and over what period you have achieved these. These stats I think are enviable and could be broadcast.

I think others have not yet cottoned on to how well the SIF portfolio, your application of rule-based investing and your intelligent coverage are actually doing.

Obviously others have their own investing styles, but yours IMO, has some important messages which can benefit different approaches.

In short, I do not see why you cannot add a bit of 'marketing' into a title or two every once in a while. It just might grab more attention. As your pieces deserve it.

Regards
Howard

jonesj

I could not buy this on simple valuation grounds.
It's currently on a PE of 23.5, which is high for this type of business. That must already be pricing in some recovery.
Even if they double the current margins, the PE is still in double figures and the margin would already be over 4%. Difficult to see it going much beyond that. What am I missing ?

Just made a rare visit to one of their stores. Decided to continue splitting my shopping between Lidl and Sainsburys.

Roland Head

26th Jul '18

Hi Jim,

Thanks for your comments. Your description of the "bowl chart" is very apt. In my own value investments, I tend to find that the key to success is not to rush in too soon. It takes a while for momentum to turn positive, even when the value opportunity is clearly defined.

It would certainly be interesting to spend some time trying to work out screening rules to pick up turnaround opportunities. I've dabbled with this before, but not reached a satisfactory conclusion. I'll have to try and find some more time for it!

Regards,

Roland

Hi jonesj,

Thanks for your comment. I agree that continued recovery at Tesco (LON:TSCO) is already reflected in the price. But its cash generation and economies of scale (as the UK's largest supermaret) are impressive, in my view. I'm impressed by the quality of management at present.

At current levels, I don't see big capital gains, but I do think it could be a good long-term income buy.

In terms of shopping experience, I split my shopping between Lidl and J Sainsbury (LON:SBRY) too. But that's because they're closest to where I live. If it was Tesco and Aldi nearby, I'd go to them instead.

I'm not sure how many people have powerful brand loyalties to supermarkets anymore, although I'm ready to be proved wrong!

Regards,

Roland

29th Jul '18

Hi Roland,

When the new charts package was launched here I did try to persuade Ed and Co. the introduce TA screening to allow screening based on MA,RSI,Stochastic etc alongside the fundamental economic indicators. I still think the 'combined' screening approach would be the best as....

1 Its fruitless and frustrating to invest in what you may think 'cheap quality' stocks if the world and his dog doesn't agree with you. You will be rewarded....one day.....soon ....maybe?

2 Its risky and nerve-fraying to invest in 'iffy' stocks just because they are going up.It feels like gambling and you may get wiped out on a whim!

Alas so far as i know the ability to screen for TA hasn't yet been introduced.

What I would like ideally is a screen that could find the value opportunity THEN alert you when the momentum has moved positive. Obviously everyone will have they're own idea on the criteria to use but then at least we have a basis for comparison and discussion. Think you could give Ed a nudge?

Regards

Jim

mmarkkj777

Hi Roland, Only just found, and read, your content on Stockopedia. A good approach and can be conservative (of capital I mean) when markets are getting overvalued. Have you considered shorts, along with defensive stocks to hedge against a possible downturn or even during a bear market?

Hi mmarkkj777,

Shorts are beyond the scope of this portfolio at the moment, and in my experience increase risk as well as creating opportunity. Perhaps I'm just not a very good shorter!

I am keen on defensive stocks but have struggled to find these at reasonable valuations in the 2+ years I've been running SIF. I hope this situation will change in time - Tesco (LON:TSCO) could be a possible example at a slightly lower price.

Regards,

Roland

Thanks Roland. I only asked as I'm trying to build a strategy for a downturn in the market (for when it inevitably arrives) I've never really shorted individual stocks (once bought a short fund of the S&P 500 for a specific purpose), so I don't know If I would be good or not. Just an alternative (defensive stocks and shorts) to exiting the market altogether, or living with the slide.

Unfortunately I held Tesco a while back and now have a reluctance to hold them (even though the players are different. Not logical, I know).

Cheers,

Mark.

Roland, BTW, have a look at Cohort Cohort (LON:CHRT) as a possible defensive stock addition to your portfolio. Good stock ranking. Defence/Off-shore Energy/Electronic systems/Cyber Security. OK dividend, with years of steady div growth. Sensible PE and PEG. No debt, has cash. Looks like a good possibility to me. Be interested in your thoughts.

M

SIF Folio: Why Tesco could be a good defensive buy

Value lies in the future

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Roland Head

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