This is an idea I’ve stolen from the excellent Monevator site. The idea is to highlight some of the more interesting things I’ve seen during the week on the off-chance that you’ll find them interesting and/or useful too:
- Morningstar’s guide to financial education – A week-long series of articles from the good people at Morningstar
- Top 20 dividend paying stocks – Another one from Morningstar, and a pretty good list of stocks too if I do say so myself
- Avoiding failure is a key to long-term success – Richard Beddard (of Interactive Investor) reaches 5 years with his Share Sleuth portfolio. Includes snazzy infographic
- Don’t discount the food retailers – An excellent and more positive review of Tesco and the other major supermarkets from Simon Gergel of Allianz Global Investors
- How investors ignored the warning signs at Tesco – Another point of view from Terry Smith of Fundsmith
- Know thyself, your traits are important – A good article and short videos from Barclays Wealth on the importance of knowing how you’ll respond to bad news before it happens, so that you can design your portfolio accordingly
- The poor performance record of actively managed funds – Another article in a series around Sensible Investings new video series on the joys of passive investing and the perils of active investing.
Disclosure – Tesco is a holding in both my personal portfolio and the UKVI defensive value model portfolio
Some interesting links. What did you think of the ROCE chart for Tesco in the “How investors ignored the warnings signs in Tesco” article? Of course hindsight makes for very strong proof, but it does paint a compelling picture. I’ve noticed you don’t often talk about ROCE over time in your analysis of companies – what’s the reason?
HI Bob,
I’m not overly convinced by the arguments put forward by Terry Smith. The main points of that article in relation to ROCE seem to me to be:
1. ROCE is the primary measure of managerial performance and/or the quality of the company
2. Tesco ROCE is in some sort of long-term structural decline
3. Assuming point 2 is true, that this is indicative of future performance of both the company and its shares, i.e. continued decline ad infinitum, presumably.
I’m not sure that any of those are true because:
1. ROCE is determined by industry first and company-specific attributes second. Tesco is never going to get ROCE numbers like British American Tobacco.
2. The chart in the article could easily be interpreted as a high ROCE of 19% in 1998 when the economy was booming, falling to about 14% in the near-recession of 2003, climbing back to 17% in the boom to 2008, and then falling again to 11% in the near-depression of 2009, and then rebounding to 13% afterwards. It just looks like the normal ups and downs of a company through various business cycles.
3. I don’t think any past decline, assuming there is one (although I don’t see particularly strong evidence in his chart that there is), is especially indicative of Tesco’s future. Not of the company, and especially not of the performance of its shares. It’s pretty easy to imagine a scenario where the economy picks up, the threat from Aldi et al falls away, and Tesco begins to dominate again thanks to its Clubcard data, Tesco Bank and other differentiating factors.
It will be interesting to revisit this current saga in perhaps 5 years to see how it panned out, at least up to that point, but I think that currently it is far too early to make high conviction statements on the long-term future of Tesco.
As for why I don’t mention ROCE, it’s because I in the past I haven’t really paid it much attention. However, that’s changing and I’ve recently been looking into ways of factoring in some sort of internal return measure, probably ROE, in a way that is robust from one year to the next. My current preferred approach is 10-year median ROE, so you might start to see that mentioned soon (as I did in my recent article on Sage).
John
I think you miss-interpreted what Terry Smith said. The graph does not show only the ROCE but also the EPS. What he said is that an increasing earning per share is not sustainable when the ROCE is declining.
Tesco decline is not only the result of competition on its own main market (UK) from Aldi and Lidll, it is the result of years of poor investment strategy. The Aldi and Lidll war on prices was only the cherry on the cake, the problems for Tesco are in the way employed its funds (retained profits and borrowed money).
Retained profits and increased debt were employed in expanding in overseas markets where the return on investments was small or in some cases a loss.
Think what would have happened if those funds invested would have brought a rate or return of 15% as the average ROCE and not only 5% as in reality. Those funds could have been used in different ways – more profitable: buying farms, or build those new UK mini-mall stores with crèches as you said in another post or build an upmarket brand (or make an offer for Waitrose). The options were there, however Tesco management made wrong choices.
What is interesting is that Warren Buffett who is cited in Terry Smith’s article invested in Tesco at the start of 2013, although he sold some of the shares in 2014. Not even him practices what he preaches.