Monday, October 30, 2006

Sorry sale of Tesco

What do you do when a stock you love reaches your price target? You let your head rule and sell some of course.

All price targets must have a date to be meaningful, and I decided that if Tesco reached 400p this year it would be fully valued and some profits should be taken. So when Tesco passed this milestone last week I sold half my holding for a 25% profit.

The 25% gain has occurred during the last 5 months and it is hard to understand exactly why investor sentiment has changed so much. Tesco has great management, great defensive qualities, a share buy back and the possibility of some of their property assets being liquidated and returned to shareholders. However the forward PE is now over 16 and growth is 11%. That is a rich valuation in my book.

Will Tesco continue to rise from here? Quite possibly but if it does I still have some exposure to it. And if it falls I can accumulate some more at a more realistic price.

Tesco is a fantastic company but all companies have their price.

Friday, October 20, 2006

eBay spark needed

eBay's Q3 earnings release is out and Wall Street seems to like it, though I am not completely sure why.

The shares were up 7% on Thursday which made a pleasant change but boy has the share price got some recovery to do.

Organic revenue growth for 2007 is projected to be in the region of 17 to 21%. This is the most important figure for me. eBay is no longer the 40% growth monster it used to be. It has become a victim of its own success and growth will now be at a much more modest rate. No wonder investors have been selling in droves.

Where will the sparks come from to ignite another buying frenzy on Wall Street? Not Skype, which looks like it is not going to make its $200 million revenue target for this year. Not the auctions, which are growing at 20% and are under competitive pressure in Korea and China.

PayPal is still growing at 40% but is still only 25% of total revenues.

One unexpected positive was the acceleration of advertising revenue growth - up 44% on last year. That is impressive but it is starting from a very small base and is already well behind Skype.

eBay has a business model to die for but that is not enough to guarantee investment success over the medium term. The last 24 months of investing in eBay have taught me that. However over the long term I expect eBay to win in its battle to grow faster than ecommerce. And that means that one day my shares will show a substantial profit. But maybe not next year.

Friday, October 13, 2006

Every little helps

Tesco has been one of the few success stories in my portfolio this year. After doing almost nothing for 12 months the share price has climbed steadily for the last 4 months and I am now at 20% profit.

Tesco is a NICE company to invest in. Its core business is defensive as people always need to eat. It is growing streadily in the UK (10%) and rapidly abroad where it has operations in central Europe and Asia.

The problem for Tesco is that as it branches more and more into non-food items the business will be exposed more and more to the uncertainties of consumer confidence. This will dilute the defensive qualities of the stock and lead to multiple compression.

Is this point important? Not yet but it is something that analysts do not have seemed to considered.

The best thing about about Tesco is the management. The leadership is dynamic, proactive and seem to know what the public wants. That is worth a lot.

Despite this I think Tesco is fully valued at 380p. The 2007 PE is about 16 and growth is 11%. I have decided to take some profits if it reaches 400p this year.

Tesco is quality but quality does not come cheap!