Tesco's troubles split funds seeking oversold stocks

Wed Dec 10, 2014 12:10pm EST
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By Simon Jessop and Nishant Kumar

LONDON (Reuters) - A halving of Tesco's (TSCO.L: Quote) share price is luring only the boldest active fund managers back into Britain's top supermarket group, with many still unpersuaded it can recover from a year of disasters.

While still Britain's biggest grocer by far, Tesco's days of achieving startling growth appear to be over. However, some fund managers tasked with hunting out cheap stocks ripe for a rebound are taking the plunge.

Doubters, on the other hand, argue that Tesco has yet to become a value stock, attractive for its price as much as its business growth prospects.

Tesco has issued a string of profit warnings as low-cost rivals eat into its business. Its problems deepened in September when it admitted to overstating earnings, prompting a series of investigations including by Britain's Serious Fraud Office (SFO) and leading to a fourth lowering of profit forecasts on Tuesday.

Many shareholders have bailed out during the 53 percent slide in Tesco stock since the start of the year, including legendary U.S. investor Warren Buffett. Concerns also remain about the company's governance and strategy.

Index tracker funds, which have no choice but to buy constituent stocks as investors give them money, remain among the biggest buyers of Tesco shares.

However, some active "value" funds, which seek oversold stocks, have also bought in as Tesco has shuffled its management and prepares to announce a strategic plan in January.

To them, Tesco already looks cheap. Its market value has lost 12.8 billion pounds ($20 billion) this year and the shares trade at 0.9 times the forecast value of its assets over the next 12 months, 53 percent below its 10-year median.   Continued...

A woman walks past a Tesco supermarket in central London, December 9, 2014. REUTERS/Toby Melville