Motley Fool: Is Tesco a ‘deadly value trap?

The roster of names includes such shares as Tesco. Currently the market’s whipping boy for a long list of heinous crimes including a sagging market share, a weak board and misstated accounts. Investors are supposed to be fleeing the stock in droves, rather than buying it.

So too with companies such as GlaxoSmithKline, ASOS, Majestic Wine and Centrica. In short, despite their intrinsic virtues, these and other such stocks are firmly out of favour.

Reverting to Tesco for a moment, fund managers and analysts have been falling over themselves to explain why they aren’t buying it, despite the share price touching levels not seen for well over a decade.

Jeremy Lang, manager of the Ardevora UK Income fund, thinks Tesco is a value trap. Francis Brooke, who runs the Trojan Income fund, has sold out and won’t be buying back in. Job Curtis, of the City of London Investment trust, is another seller not attracted back at present levels. And so on, and so on.

What’s more, although I haven’t asked them, they probably wouldn’t be interested in some of the other companies that I’ve been tempted by recently. But frankly, I wouldn’t buy these shares either, if I were in their shoes. 

Hang on, I hear you say. I thought you’d just said you were tempted to buy?

Well, I am. But I’m not a high-profile fund manager — and at the moment, because such naysayers are getting all the press coverage, the ‘bargepole’ view is fast gaining favour.

Just take a look at what these well-respected managers all do for a living: they all manage income funds, or (in Job Curtis’ case) an investment trust renowned for the high and sustained dividend growth that it achieves.

So in their income-centric shoes, one has to ask: is Tesco — or a number of other such shares — likely to deliver a decent, growing income? Quite the contrary, as we’ve seen with the company’s 75% cut in its interim dividend.

Which is why, in the case of income-fund managers subject to intense and minute quarter-by-quarter scrutiny, there’s little incentive to take risks with shares that might play fast and loose with dividends — even when, as in Tesco’s case, it has a long-term record of rewarding shareholders very handsomely.

But you and I are different. No one is subjecting our investing record to intense quarter-by-quarter scrutiny of its income performance, so we’re freer to take a longer-term view.

And the view that I often take is one that is five to ten years out — which, after all, is when I plan to rely on my investment income when I retire.

Certainly, Tesco and several other beaten-down shares are in difficulty and out of fashion. But I’d be very surprised if their problems persisted for half a decade or more.

So viewed that way, what’s on offer today is the opportunity to buy into a blue-chip income stream at bargain basement levels – and potentially bank some decent capital growth as well.

There are always downsides, of course. Although companies ‘self-heal’ a lot of the time, sometimes they don’t. Especially when accompanied by some sort of accounting scandal – which is certainly something that is spooking the City in Tesco’s case.

But in my view, rather than bleating about the supposed coming dominance of the UK high street by Lidl and Aldi, Tesco shareholders and would-be shareholders should be thinking back to the misstating of oil reserves at Royal Dutch Shell, a similar accounting scandal that was revealed in 2004.

Few people now remember the affair, but on the back of ‘Peak Oil’ and the Gulf War, the reserves misstating caused Shell shares to plunge to bargain basement levels.

What’s happened since? Simple. Shares in Shell have climbed 72%, while the broader FTSE 100 index has gained only much a more modest 44%.

And over that period Shell shares have consistently offered an attractive yield, meaning that shareholders have banked decent capital gains and an enviable income stream.

None of which was foretold by the naysayers and doom-mongers back in 2004.

Finally, let me leave you with a statistic. Last week, it seems that dealing in Tesco shares soared 30-fold at private investor broker Hargreaves Lansdown. And apparently, 92% of those trades were buys.

So here’s a question to mull over: do Hargreaves Lansdown’s savvy clients know something that you don’t?

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