Why Warren Buffett sold his entire stake in a FTSE 100 retailer
Warren Buffett isnât really known for having significant investment in FTSE 100 companies. The only one Berkshire Hathaway has an interest in right now is spirits company Diageo.
In the past, however, Buffett used to have a decent-sized stake in Tesco (LSE:TSCO). And I think the Oracle of Omahaâs reasons for selling the stock are worth paying attention to today.
Buffettâs Tesco investment
Buffett began buying shares in Tesco in 2006 and by 2012 had come to own around 5% of the entire company. But the Berkshire CEO eventually sold his entire stake between 2013 and 2014.
One reason for Buffett’s change in view was Aldi and Lidl emerged as genuine rivals. But the other was the discovery that Tesco had been inflating profits by recognising revenue from suppliers in its income statement too early.
The firm launched an investigation, but it still suffered significant damage to its reputation. It was also fined £129m by the Serious Fraud Office and £85m by the Financial Conduct Authority.
That was enough to convince Buffett to sell, but the Oracle of Omaha didn’t immediately ditch the FTSE 100 retailer. Instead, Berkshire unloaded shares gradually as the situation unfolded.
Buffett later noted that the strategy of being patient probably caused Berkshire’s losses to be greater than they would otherwise have been. But this was difficult to see at the time.
The accounting issue is now well behind Tesco. But there’s another UK company in my portfolio that’s dealing with a strikingly similar issue at the moment.
WH Smith
Last month, WH Smith (LSE:SMWH) announced that this year’s profits are set to be around £70m lower than expected. The reason: booking revenues from suppliers too early.
The reported issue is in the firmâs North American division. The exact scope of the problem, however, is unclear â there’s an investigation going on to establish that.
The parallels between the issues at Tesco a decade ago and the current problems at WH Smith are striking. But there are a couple of important differences.
One is that â as far as I can see â WH Smith isnât facing the same competitive challenges Tesco was. Having sold off its high street operations to focus on travel outlets, I think itâs in a strong position.
Another is that a number of Tesco’s historic fines were to do with breaching industry standard rules around the treatment of grocery suppliers. These don’t apply to WH Smith.
The two situations arenât the same, but they do have a lot in common. And this gives investors a tricky choice, which is why Iâve been thinking about Warren Buffettâs approach to Tesco.
A dilemma
My instinct with my WH Smith investment is to follow Warren Buffettâs example with Tesco. That involves being patient and waiting, rather than selling immediately.
This is risky, and the benefit of hindsight reveals that Berkshire might have done better with a different approach. But investing always involves risk.
All investors can do is what seems best at the time. And I think there are still good reasons for optimism about WH Smith over the long term.
I still think the firmâs competitive position is a long-term strength. But I can understand why other investors might think thereâs too much risk to consider buying the stock at the moment.
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Stephen Wright has positions in Berkshire Hathaway, Diageo Plc, and WH Smith. The Motley Fool UK has recommended Diageo Plc, Tesco Plc, and WH Smith. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
