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Would an esteemed value investor such as Warren Buffet buy Tesco shares today?

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Do Tesco's fundamentals live up to Buffet's standards?

Tesco has come a long way in recent years. While the convenience sector benefited from the lockdown, the company grew sales at a faster rate. But would Warren Buffet be keen on Tesco shares today? 

There was a time when Mr. Buffet bought Tesco (LSE: TSCO) shares. It was not the most profitable decision he made since he lost hundreds of millions of dollars before selling it. It was a costly mistake. 

Buffet looks at the fundamentals, not those confusing charts and lines. 

As a value investor, Buffett isn’t concerned with the technical details of the stock market. He’s not concerned with the daily activities of the stock market at all. The behavior is the implication in his famous paraphrase of a Benjamin Graham quote: 

“In the short run, a market is a voting machine, but in the long run, it is a weighing machine.” 

He looks at each company as a whole, so he chooses stocks solely based on their overall potential as a company. Notably, Mr. Buffet looks for the company’s competitive advantage, or ‘economic moat’ as he says it. The strategy refers to factors that allow a company to produce goods or services better than its rivals, providing superior margins or more sales than its competitors. 

 Do Tesco’s fundamentals live up to Buffet’s standards? 

Nowadays, Tesco has lost a significant market share to Aldi, Lidl, and Ocado, which is well-supported by data. Tesco, and the overall grocery market, suddenly experienced slow growth as the market eases out of lockdown. One of the most significant lockdown trends, online shopping, reached another new record market share recently – with 13.5% of all sales now ordered through the internet. Ocado has been a significant beneficiary of this, and it also hit a new record this month, registering a market share of 1.8% over the past 12 weeks. 

Another thing Buffet looks for in a company is a high degree of profitability. Of course, with increased profitability comes more income to further growth through reinvestments and more dividends and value appreciation. 

Tesco, however, lacks ROCE. It has averaged just 6.3% in 5 years. By comparison – Apple, Warren Buffett’s top holding, has averaged a ROCE of 27.4%. 

Warren Buffet also does not like debts. In Tesco’s half-year results, the company advised that it had net debt of £12.5bn on 29 August.  

Most importantly, Warren Buffet looks out for the company’s valuation. Currently, Tesco shares to hold a P/E ratio of 15.8. While it’s not exceptionally high, it’s also not a bargain. It just matches closely with the P/E ratio of the FTSE 100 index.  

All things said, Tesco isn’t a feasible basket to put your eggs. Warren Buffet would lookout for better stocks.

Jinel Franco is a Multi-Media Artist and a Content Marketing Strategist. For the past 3 years, she has helped several companies and individuals bring out the best of their brand with quality content and media.

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