James Moore: Take a tip from Warren Buffett and buy some Tesco shares

Investment view

The retail sector is one to approach with caution. Consumers have less money in their pockets, too much debt that needs paying off, and precious little confidence.

On the face of it, the supermarkets at least look more defensive than most. They tend to own their stores (so don't have rent to worry about), have manageable debt and their mainstay is not something consumers can do without.

But the big three UK-listed chains still face serious challenges. Yesterday Goldman Sachs downgraded the lot. The broker feels that their ongoing land grab will prove "value destructive" while competition for the hard-pressed consumer's pound is heating up. More price wars are on the way.

Not so defensive then?

Let's take Tesco first. Post-profit warning, its multiple has declined to 9.4 times forecast earnings for the year ending 29 February 2012, falling to 8.9 times for 2013 with a forecast yield nearing 5 per cent. The sector heavyweight has expanded rapidly overseas, but has dropped the ball at home. As such, it is going to spend several hundred million pounds tarting up its UK stores and hiring more staff in an attempt to make its customers feel loved. It might also care to spend a few quid on customer service training for the drivers who deliver its online offering. They could learn a thing or two from Ocado. It doesn't cost much to smile a bit.

Chief executive Philip Clarke's plans have received a vote of confidence from legendary US investor Warren Buffet, who has been buying shares. No wonder. Tesco is the cheapest of the big three on valuation grounds and has that overseas growth to offer. It is also not the sort of organisation to miss the fact that it has a hard lesson to learn.

Staff too have felt the pinch: they won't make the sort of returns under the share-save scheme they have become accustomed to. They can take a £275 cash bonus. Or they can stick with the shares. We'd take our cue from Mr Buffett. Buy.

J Sainsbury chief executive Justin King said he saw "more of the same" on the horizon for 2012. If so, it won't be all bad news for the company's shareholders: Sainsbury's won the battle for Christmas sales, posting a modest rise. In addition to the aforementioned land grab, it has expanded existing outlets and added some zip to its convenience stores, online and non-food offerings. (Supermarket non-food offerings might hold up better than expected – they are perceived as being cheap.)

Sainsbury's has more leasehold stores than rivals, which I don't like, but also a more middle-class customer base, although Mr King gets irritated if you suggest this to him – Sainsbury's is for everyone.

Sainsbury's trades on 10.5 times forecasts for the year to 31 March, falling to 9.7 times for 2013 and has the best yield of the lot at 5.6 per cent rising to 5.9 per cent. For low-risk, income investors there may be safer bets (as I suggested this week), but that's still not to be sniffed at. The Qataris also remain on the scene, and their continued interest should provide a floor for the shares. Hold.

Trading on 11.5 times the year to 31 January, falling to 10.1 times in 2013 forecasts, while yielding 3.7 per cent rising to 4.3 per cent, Morrisons is not only the smallest of the big three, it is also the most expensive (at least in terms of the shares). The most reliant on food, it has only just started building convenience stores and still has a lot of growth to shoot for. However, it arguably has less firepower to compete in the event of a really nasty price war and doesn't have Sainsbury's saving grace of more upscale consumers (who might pay more).

This column has been a backer of Morrisons, but at these levels the chain, which endured a disappointing Christmas, is our least-favoured of the three. Take profits.

PROMOTED VIDEO
Life and Style
fashionHealth concerns and 'pornified' perceptions have made women more conscious at the beach
Arts and Entertainment
tv
Sport
Ojo Onaolapo celebrates winning the bronze medal
commonwealth games
Arts and Entertainment
Rock band Led Zeppelin in the early 1970s
musicLed Zeppelin to release alternative Stairway To Heaven after 43 years
Arts and Entertainment
High-flyer: Chris Pratt in 'Guardians of the Galaxy'
filmHe was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star
Sport
Van Gaal said that his challenge in taking over Bobby Robson's Barcelona team in 1993 has been easier than the task of resurrecting the current United side
footballA colourful discussion on tactics, the merits of the English footballer and rebuilding Manchester United
Life and Style
Sainsbury's could roll the lorries out across its whole fleet if they are successful
tech
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Travel
The shipping news: a typical Snoozebox construction
travelSpending the night in a shipping container doesn't sound appealing, but mobile crash pads are popping up at the summer's biggest events
Arts and Entertainment
'Old Fashioned' will be a different kind of love story to '50 Shades'
film
Arts and Entertainment
Tracey Emin's 'My Bed' is returning to the Tate more than 15 years after it first caused shockwaves at the gallery
artTracey Emin's bed returns to the Tate after record sale
Arts and Entertainment
Smart mover: Peter Bazalgette
filmHow live cinema screenings can boost arts audiences
Environment
Neil Young performing at Hyde Park, London, earlier this month
environment
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Project Manager (HR)- Bristol - Upto £400 p/day

£350 - £400 per annum + competitive: Orgtel: Project Manager (specializing in ...

Graduate / Trainee Recruitment Consultant - IT

£25000 per annum + OTE £40,000: SThree: Orgtel are seeking Graduate Trainee Re...

HR Business Partner - Banking Finance - Brentwood - £45K

£45000 per annum + Benefits: Ashdown Group: ** HR Business Partner - Senior H...

PA / Team Secretary - Wimbledon

£28000 - £32000 per annum + Benefits: Ashdown Group: PA / Team Secretary - Mat...

Day In a Page

Save the tiger: The animals bred for bones on China’s tiger farms

The animals bred for bones on China’s tiger farms

The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

A former custard factory, a Midlands bog and a Leeds cemetery

Introducing the top 50 hidden spots in Britain
Ebola epidemic: Plagued by fear

Ebola epidemic: Plagued by fear

How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

From 'Parks and Recreation' to 'Guardians of the Galaxy'

He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star
How live cinema screenings can boost arts audiences

How live cinema screenings can boost arts audiences

Broadcasting plays and exhibitions to cinemas is a sure-fire box office smash
Shipping container hotels: Pop-up hotels filling a niche

Pop-up hotels filling a niche

Spending the night in a shipping container doesn't sound appealing, but these mobile crash pads are popping up at the summer's biggest events
Native American headdresses are not fashion accessories

Feather dust-up

A Canadian festival has banned Native American headwear. Haven't we been here before?
Boris Johnson's war on diesel

Boris Johnson's war on diesel

11m cars here run on diesel. It's seen as a greener alternative to unleaded petrol. So why is London's mayor on a crusade against the black pump?
5 best waterproof cameras

Splash and flash: 5 best waterproof cameras

Don't let water stop you taking snaps with one of these machines that will take you from the sand to meters deep
Louis van Gaal interview: Manchester United manager discusses tactics and rebuilding after the David Moyes era

Louis van Gaal interview

Manchester United manager discusses tactics and rebuilding after the David Moyes era
Will Gore: The goodwill shown by fans towards Alastair Cook will evaporate rapidly if India win the series

Will Gore: Outside Edge

The goodwill shown by fans towards Alastair Cook will evaporate rapidly if India win the series
The children were playing in the street with toy guns. The air strikes were tragically real

The air strikes were tragically real

The children were playing in the street with toy guns
Boozy, ignorant, intolerant, but very polite – The British, as others see us

Britain as others see us

Boozy, ignorant, intolerant, but very polite
How did our legends really begin?

How did our legends really begin?

Applying the theory of evolution to the world's many mythologies
Watch out: Lambrusco is back on the menu

Lambrusco is back on the menu

Naff Seventies corner-shop staple is this year's Aperol Spritz