The stock market has been very interesting this year, and even large-cap shares have been vulnerable. There’s no such thing as a safe share.
Tate & Lyle (LON:TATE) issued a profit warning, with supply chain issues, weather affecting corn plant production, an an industrial incident at its Singapore facility. Shares are down 17% to 607.5p in early trade.
Tesco (LON:TSCO) shares are down another 2.4% as at writing, with a share price of 198p. I wrote about Tesco at the end of August
(http://is.gd/fiA5WN), and came up with a fair value for Tesco of 200p, based on a dividend growth model. So TSCO do not look compelling value to buy, at the moment. I now think my estimate of value is likely to be overstated, though. The recent news of accounting mis-statements must surely mean that my assumption about future dividends was too optimistic. Its bonds slid. In June, Moody’s downgraded Tesco’s rating to Baa2:
“an obligor has ADEQUATE capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.”
It is still considered investment grade. At the time, Moody said that Tesco’s outlook was stable, so another downgrade was not anticipated. In light of recent developments, it will be interesting to see if there is a shift in its ratings.
TSCO is an example of a value investors worst nightmare. They look cheap all the way down. Things go from bad to worse, and what once looked like good value now looks like overvalued. We must constantly remind ourselves that value investing is no panacea, and that cheap PEs could merely be a reflection of low (or even negative) growth, or riskiness.
TSCO still has the ability to rock the markets, suggesting that the share price has not fully absorbed all information. From where we stand today, there looks like there could be a lot more bad news down the pike. I’m glad I am on the sidelines merely looking on.
I think one thing that can save investors a lot of money is to never to double-down on a losing trade; except, perhaps, under the most exceptional of circumstances. I’m not keen on pyramiding, either. My view now are to plonk your money down, without…
