Warren Buffett‘s Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) investment group began trading in Britain’s leading supermarket operator Tesco PLC (LON:TSCO) last autumn, buying $425 million of stock and an option to buy $125 million more.
Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) later sold off around $35 million of stock to cut its losses following a nosedive in the share price that wiped away hundreds of millions of dollars of value.
Far from being discouraged, Berkshire then reinvested in even more shares, making it Tesco PLC (LON:TSCO)’s third biggest share holder, with a stake of 3.7% at the end of 2013.
Buffett betting against the market
Berkshire piled in on Tesco shares following a January 2012 profit warning, bucking the trend of investors selling the stocks.
Shares in Tesco have fallen as much as 43% this year, at a loss of almost $750 million to Berkshire Hathaway. The stocks fell 12% on Monday alone following an announcement that it had apparently overestimated its half-yearly earnings by $407 million.
Four Tesco PLC (LON:TSCO) executives have been suspended and auditors from Deloitte have been called in to investigate how profits seemingly fall far below expected levels. Alastair McCaig, a market analyst at IG in London, stated that “considering all the problems that Tesco is tackling at the moment … poor internal accounting issues was the last thing it needed. A downgrade of 23% for its profit forecast is more than a minor issue.”
Buy or sell Tesco stocks?
Judging by his track record it seems unlikely that Warren Buffett will be panicking, yet. Although around $5 billion has been wiped off Tesco PLC (LON:TSCO)’s market value since the scandal broke, some investors are backing the stock to bounce back.
Most analysts are advising readers to avoid the stocks, but other notable investors are seizing the opportunity to take up positions at bargain prices. Mike Ashley, chief shareholder of U.K. sports retailer Sports Direct, has invested in 23 million shares in partnership with Goldman Sachs, which puts the group’s maximum exposure to Tesco at around $70 million.
It would be strange to see Warren Buffett abandon his commitment to long-term investments, and it seems likely he will bide his time in the hope of a recovery.
