Sell Tesco but stick with defensives, says Neil Woodford
By
James McKeigue Feb 16, 2012
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Invesco Perpetual’s Neil Woodford
Thinking of buying Tesco shares? Then it might interest you to know that Neil Woodford has sold his stake. In January, the much-followed manager of Invesco Perpetual’s High Income Fund was one of many high-profile investors hit by the retailer’s first profit warning for 20 years. The shares slumped by 16% in a day, after Tesco reported the worst Christmas sales for years and admitted that full year revenues would be towards the bottom of City forecasts.
According to Investment Week, along with Woodford, Psigma’s Bill Mott, Newton’s Tineke Frikkee, F&C’s Phil Doel and even Warren Buffett have all held Tesco shares in the past six months.
Yet while Woodford has bailed out, Buffett has been increasing his holding since the profit warning – raising it from 3.21% to 5.08%. In fact, in a recent interview in The Independent with Hargreaves Lansdown’s Mark Dampier, Woodford reveals that he was able to exit his Tesco stake so quickly because Buffett was buying.
So what does Woodford know that Buffett doesn’t? According to Dampier, Woodford believes the supermarket giant “has too many plates spinning” and restructuring the company has become more onerous because the competition is now hard on its heels.
What does Woodford favour now? Not banks, which are conspicuously absent from his portfolio. He is bearish on the sector, says Dampier, believing that we have not yet seen the last of the financial crisis.
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Woodford thinks we could see more nationalisations and that banks will have to cut lending to businesses, as well as write-off more bad debts. He is also concerned, says Dampier, by the fact that around half of all mortgages remain interest-free loans, fearing that some banks may not be repaid the capital.
Woodford also claims that other fund managers mistakenly believe the recovery is just around the corner and are using what he calls a “conventional lens” to pick cyclical stocks, believing they will benefit. He thinks the investment game has changed for good – that policymakers have few “tools” available to respond to the crisis and that many of his peers have yet to wake up to this fact.
So he still favours resilient companies with strong balance sheets and which generate plenty of cash and grow dividends. These include electricity company Drax, which Woodford sees as a solid renewable energy play. He also continues to like pharmaceuticals, maintaining substantial holdings in AstraZeneca, GlaxoSmithKline, Roche and Novartis.
Other favourites include Rolls-Royce and BAE Systems. Woodford claims that both companies are undervalued despite concerns over cuts to defence budgets, which he believes will not harm the businesses over the longer term. Both companies, he reckons, should still benefit from “plenty of recurring income” from maintenance work.
Meanwhile, says Dampier, Woodford predicts that the West has an “arduous grind” ahead of it and the European Central Bank’s Long Term Refinancing Operation is just “the starting gun for deleveraging”.
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