Knowing when to sell your shares is one of the most important skills in share investing.
If you want to make money then it is just as important to sell at the right time as it is to buy at the right time.
But when is the right time to sell?
In an earlier post, I said that the time to sell is “when the story has changed”.
Knowing your story, i.e. the reason why you bought your shares in the first place, is therefore key to knowing when to sell.
Let me illustrate this with an example.
Tesco is a large supermarket business, listed on the London Stock Exchange and a member of the FTSE 100 index.
I bought some shares in Tesco in January 2011 and bought some more of them in April 2011 after strong results.
But in January 2012, Tesco announced a profit warning for the first time in 20 years.
Now, for many people, the profit warning might have been a signal to sell their share holdings and I confess, I did think long and hard about selling mine.
But I didn’t, because my story was still in tact.
What Was My Story For Tesco?
My reason for buying Tesco shares, back in 2011 was as follows:
- Tesco was the dominant player in the UK supermarket sector and was growing faster than its competition. It was also expanding into non-food areas and was expanding rapidly there too.
- Tesco had demonstrated a long track record of growth over a number of years, under its leader Sir Terry Leahy, and had shown entrepreneurship and great judgement in moving into new sectors and partnerships such as Insurance and Banking.
- Tesco had been expanding overseas in a number of emerging economies and was showing faster growth than in the UK. I could see that it would not be long before Tesco would be generating more sales and profits outside of the UK than it was in the UK.
- Tesco had recently entered the USA market under the brand name “Fresh And Easy” and whilst it was currently making a loss, I was comfortable that Tesco’s management were doing the right things for the US operation to become another success.
As an indicator of this last point, the PEG for Tesco was 0.62 i.e. well below 1.
Tesco Profit Warning
Almost a year after I bought my Tesco shares, the company announced a profit warning.
This came as a result of poor Christmas trading figures during December 2011.
At the time, 60% of Tesco’s profits were coming from the UK and Philip Clarke, the recently appointed CEO taking over from Sir Terry Leahy, was cited as saying that “Tesco needed to sort out basics like fresh food, product ranges, customer service and staffing levels, to win back shoppers who had defected to Sainsbury’s and Waitrose, and even no-frills chains Aldi and Lidl, for their turkeys and sprouts.”
Philip Clarke decided to take more interest in the UK retailing division by running it himself.
The result of the profit warning in January 2012 was a share price drop from around 400p to around 320p.
Now there were a number of things here that worried me, such as the announcement of problems in the UK and the CEO deciding to spend a large chunk of his time on it, but at least the Tesco management seemed to be acknowledging their problems and pouncing on them.
I also thought that the share price drop was overdone and would recover to some extent.
Not only that, but the overseas expansion was still going on as before and the US market offering seemed to be getting better and was on the verge of starting to make a profit.
My story was more or less unchanged and so I decided to ride the Tesco train for a bit longer whilst keeping my eye on it.
But all that changed earlier this week.
Tesco’s Latest Announcement
Earlier this week, Tesco announced that Tim Mason, one of Sir Terry Leahy’s right-hand men was leaving the business.
The reason Tesco gave for his departure was that they were reviewing the future of the USA market strategy and were expecting to close or sell the US business.
For me, this is a major change to my story and reason for why I expected Tesco to keep growing.
For what it’s worth, I think that Tesco’s Philip Clarke is wrong to get out of the USA market, just as it is starting to make progress.
Obviously, I have a lot less information than Philip Clarke does about the business, but I have the advantage that I am not stuck in the weeds of it like he might be.
We’ve seen this kind of thing before with Marks & Spencer, spending lots of money entering the USA market and then dropping it when the CEO changes.
To me, this decision smacks of the new CEO wanting to exert his authority and make the strategy his, rather than that of the previous CEO and his right-hand man Tim Mason.
I would also be very surprised if there has not been some robust discussions between Philip Clarke and Tim Mason and a “personality clash” of some kind.
Whilst this is bad in itself, it’s not the end of my issues.
Tesco has also announced that it is scaling back its capital spend on its international expansion to divert the capital into fixing the UK.
I don’t like this either because it slows the growth that I am seeking and allows large competitors to continue developing their overseas offerings while Tesco retrenches.
But the biggest reason that I decided to sell my Tesco shares this week is this…
Tesco Now Has An Unproven Management Team And I Don’t Agree With Their Decisions
I’ve already said that I think Philip Clarke is wrong to alter his USA strategy.
I’ve also said that Tim Mason is leaving the business.
What I haven’t said is that the third man credited with the Tesco growth story over 20 years, the Finance and Strategy Director, Andrew Higginson also stepped down in September 2012.
In essence, the top team has all gone and to be replaced by what?
Philip Clarke who is behaving (in my humble opinion) as if he only needs to worry about the UK.
Yes I know that the UK accounts for 60% of Tesco profits, but he can’t just forget about the other 40%.
This man is supposed to be the global CEO, not the UK MD.
When Philip Clarke has his head in the weeds of the UK’s significant problems, how can he possibly keep abreast of the wider global forest?
My view is that he can’t – and I’ve seen far too many examples of this kind of behaviour going wrong elsewhere.
In my opinion, the CEO should do the job of the CEO and appoint someone (not himself) to sort out the UK.
My Story Has Now Changed
Going back to my four reasons for buying Tesco shares, we see that only the first one remains.
The other three reasons have all evaporated in the space of the last 12 months and this is not unusual when a new CEO arrives after a long period of stable strategy.
At the time of writing this post, I no longer hold shares in Tesco.
However, I note that the Tesco share price rose about 10p yesterday, on the day that this latest news broke.
So clearly, not everyone in the stock market agrees with my views!
Maybe they are all short-term investors and like the fact that Tesco is calling time on the USA business, Fresh And Easy?
Getting rid of a loss-making division and possibly selling it off to realize some cash earlier will indeed improve the short-term profits and cash flow of Tesco.
But is this the best long-term decision?
I’d love to hear your thoughts on this in the comments box below.
DISCLAIMER – All the views in this article are my own and nothing within it constitutes advice or recommendations to buy or sell shares in Tesco or any other company for that matter. Always do your own research and make your own judgements when investing.