Every little helps is the “strap line” currently used by Tesco PLC, a major retail giant listed within the UK’s FTSE 100 stock-index, the bluest of blue-chip companies. The rationale of the strap line is to state that Tesco’s competitive pricing policy helps all house-hold budgets, particularly in these more austere times, albeit that a
cynic realist would observe that it’s been more to do with the growth of online retailing and the entry of the discount retailers such as LIDL and ALDI, whose increased presence has decimated the profit margins of Tesco and the other major retailers.
“Every Little Helps,” took on a whole new meaning this week, as Tesco revealed it had overstated its half-year profits by £250m, no small amount.
As the share price collapsed by 12%, the group chief executive, Dave Lewis, held a conference call for investors, stating that Tesco has contacted the financial regulator, who will investigate the matter, along with Tesco itself.
The purpose of this blog isn’t to cast an opinion on how or why the company overstated profits, that’s the job of the respective investigations. It is to analyse the history of Tesco’s share price, by way of technical analysis, to see IF there were any clues to an expected share price collapse, regardless of the perceived eventual news catalyst blamed for the fall.
Fist up is the chart above of Tesco’s share price, showing weekly data going back 4+ years to March 2010. Overlaid on it is a trading indicator that we use, which shows up as a three-coloured panel, green for buy, pink for sell and white for a neutral stance. As can be seen, Tesco’s share price has been falling for over four years now, not just the past couple of days, and is now lower by 50% from early 2010. There have been a couple of rallies’ which have been well-flagged by our trading indicator, usually ahead of any market news on profits warnings, new appointments etc.
We like to combine a shorter term observation with a long-term chart, on which we also include a proprietary tool which shows the real value of the security being measured, in this instance Tesco PLC.
Excuse this looking like a map of the London Underground, but it’s actually quite easy to follow it through.
The black line shows Tesco’s share price since it was floated back in December 1988 at 40 pence a share, through to yesterday’s closing price of 203 pence as monthly data points, with the blue line representing the 200-day moving average, which acted as “support” to the share price until early 2012 since when it has become “resistance.” The two lower lines are momentum indicators which assist on judging when a share price is becoming over-valued, by rising above their upper horizontal line, or over-sold when under the lower horizontal line.
The red line is a measure of Tesco’s real share price which, at its simplest shows the price history if debt within the company and indeed the wider economy is stripped-out. You may note that whilst the nominal share price peaked at 494 pence in November 2007, its real price actually peaked in 1999 and has fallen by 85% since that date, to 72 pence per share.
Whilst 72p is our current target for Tesco’s nominal share price, or about 65% lower from where it currently resides, its nominal price is currently over-sold, as witnessed by the two lower momentum indicators and the distance the share price is from the 200-day moving average. Furthermore, we have added a Fibonacci retracement guide, shown as the multi-coloured horizontal lines within the main body of the chart. One can observe that the share price has “re-traced” 61.8% of the whole gain from 1988 through to November 2007, a typical support point.
The “bottom line” may not be very good for Tesco at the moment, but an opportunity appears to be shaping up for a decent bounce in its share-price, perhaps back towards the 265 to 300 pence range. Personally though, I would prefer to await a change in the panel indicator to green, or at least to neutral before buying.