As someone who has been around long enough to be following Tesco’s stock market journey since the late 1980’s I found myself bemused by the share price reaction to the news that Asda was on the verge of announcing a price war.
Over the years we have got used to price wars, particularly the threat of Lidl and Aldi. They too has been around for many many years and yet Tesco has sustained a dominant position in the sector. There is a place for everyone it would appear, except perhaps Asda.
Even if we don’t dismiss Asda’s threat, it’s worth going back through time on the Apollo charts to see when the shares have been this cheap in relation to the expected return (in this case, what we refer to as Intrinsic Value.) It may be difficult to see the chart below, but what you are looking at is the Apollo Margin of Safety (the upper chart) which looks at the volatility of the share price around the expected return. We’ve taken this chart back 5 years simply because it would be difficult to view on a longer term basis, but the facts are the facts.
Some perspective is required. The last time the price traded at such a discount to Intrinsic value was October 2022. The cost of living crisis and fear of rising inflation (she who must not be mentioned.) The time before that was January 2012 when £5bn was wiped off the share price due to a profit warning that followed 30 years of ‘unchecked financial success.’ Prior to that, was the Great Financial Crisis – enough said.
I emphasise this is to put the current situation and ‘value opportunity’ in the context of the past and it’s apparent that were the past to be any guide, for a marginal investor in the stock, the risk of buying/shorting the stock is zero.
In a note we wrote earlier this week, When the cockpit goes dark, we made the point that Apollo can provide measures of risk uncertainty and value in real time. Here is such an example. For anyone that owns the stock or wants to, this looks like the opportunity to buy. For anyone who is short, this opportunity to close.