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Justin Weinstein
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I have been an independent investor for many years concentrating on executing an inherently low risk/low cost investment strategy. I sit as the president and cofounder of a charitable fund within an educational institution.
  • Is it time to buy Tesco?  0 comments
    Jan 17, 2012 1:38 PM | about stocks: WMT, TSCDY

    Tesco, one of the worlds largest food retailers, announced last week that their British stores experienced a 2.3% drop in sales over the six weeks ending January 7th. The company also warned investors that profit was shrinking, in large part due to its international business weighing on the whole company. This news sent shares of Tesco sharply lower.  


    The disappointing news came as a surprise to the market due to Tesco long being seen as one of the best operators in the world. The stock took a 16% hit the day the news was released. This type of drop is not uncommon among retailers operators when profit turns from good to bad. This is because retailers often have a difficult time turning both sales and profit around. It is a vicious cycle because when both sales and profit are in decline, a retailer cannot lower prices to bolster sales and vise versa cannot raise prices to bolster profit. 

    The question of whether the stock sold off too much this past week lies in whether Philip Clarke, Tesco President can follow through with his recent statement: "I feel very determined... This isn't going to kill us. It's going to make us stronger." The inherent problem with the company is that they over extended themselves and now the core of their business, Tesco Britain, is failing. Tesco felt that other nations like China, Brazil, and Malaysia would present a tremendous growth opportunity. At the same time they were growing the footprint of their company, they were growing the footprint of their stores. Electronics and general merchandise began taking square footage away from their foundation: grocery. Wal Mart (NYSE:WMT) began on this track of getting away from the core of their business about five years ago. Ever since, customers have been complaining about price and selection. This has led to Wal Mart loosing footing in the United States. 

    For Tesco, this is the beginning of a period of profit minimization to strengthen their British position on grocery. Although profits will be depressed over the coming year or so, Tesco is in a terrific financial position to prosper into the next decade. 

    Conclusion: Stay away from buying Tesco until clarity arises in the coming quarters of their long-term position in the marketplace. If you have time to wait out the storm, buy Tesco now. The 4.65% dividend can help offset the bumpy ride to come.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Stocks: WMT, TSCDY
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