LONDON -- This time last year, Warren Buffett, the famous billionaire U.S. investor, and Neil Woodford, the ace U.K. fund manager, took polarized positions on the investment case for top FTSE 100 supermarket Tesco (TSCO 0.65%) (TSCD.Y 0.88%).
Tesco had just issued its first profit warning in 20 years. Woodford was a seller. Buffett was a buyer. Rarely have two such renowned investors been effectively at the opposite ends of the same trade.
One year on, which of these two master investors currently looks to have made the right call?
Buffett buys big
In the wake of Tesco's profit warning, Buffett acquired an interest in more than 150 million shares, increasing his stake in the company from 3.2% to 5.1%. Buffett did the trade by entering into a somewhat complex equity-swap deal. I'm going to take an average of the prevailing prices at the time -- a round-figure number of 320 pence -- and use that value to judge his performance. At last week's closing price of 350 pence, Buffett is 9% up on the trade.
Woodford spreads his bets
Was Woodford wrong to sell Tesco? Well, that rather depends on what he bought in its place. In the report of his Invesco Perpetual High Income fund covering Jan. 1 to June 30, 2012, Woodford told us:
There was relatively little trading activity during the period. The fund sold its holding in International Power ... and sold its holding in Tesco. ... It increased its holding in Capita (CPI 1.66%) and also added to holdings in health care companies Elan, Sanofi (SNY 1.36%) and Smith & Nephew (SN 1.03%).
I've summarized Woodford's buys, the prices I calculate he bought at, and the returns to date in the table below.
|
Company |
Investment (millions of pounds) |
Buy Price per Share |
Share Price as of Jan. 18 |
Gain/Loss |
|---|---|---|---|---|
|
Smith & Nephew |
130 |
622 pence |
697 pence |
12% |
|
Sanofi |
108 |
57 euros |
72 euros |
26% |
|
Elan |
56 |
$14 |
$10 |
(29%) |
|
Capita |
55 |
662 pence |
798 pence |
21% |
|
Total weighted return |
11% |
There's not much in it, then, after one year: Buffett is up 9% on Tesco, but Woodford is slightly ahead with a weighted gain of 11% -- even though Elan has let him down badly so far.
Prospects
What are the prospects for Tesco and Woodford's four companies in the coming year? The following table gives some forecast valuation data.
|
Company |
P/E |
Earnings-per-Share Growth |
PEG |
Dividend Yield |
|---|---|---|---|---|
|
Tesco |
10.5 |
5.2% |
2 |
4.4% |
|
Smith & Nephew |
14.3 |
4.7% |
3 |
2.3% |
|
Sanofi |
11.6 |
1.5% |
7.7 |
4.2% |
|
Elan |
N/A |
N/A |
N/A |
0% |
|
Capita |
14.2 |
8% |
1.8 |
3.3% |
N/A = not applicable due to negative earnings.
On these numbers, Tesco looks a clear "value" winner. The supermarket takes the top spot on a low price-to-earnings ratio and high yield. It also takes second place on earnings-per-share growth and P/E-to-EPS growth; in the case of the latter, low equals better value.
The next best pick on the numbers is outsourcing group Capita, which comes top on two measures: EPS growth and PEG.
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