I just initiated a very small position, equivalent to 1200 dollars at the current USD/GBP exchange rate, of the UK retailer Tesco. The postion was small because the price drop took me by surprise without knowing enough about the company. The stock fell to what looks like cheap levels after some bad quarter reports. On the positive side the numbers look very good, Warren Buffett just added to his big position in September and said he would add more if the price dropped further. The chairman just bought after the drop. Besides being cheap on any valuation measure the company seems to be trading at what some consider to be below the value of its real state assets alone. Some consider the company to be a real state asset company with a retail operation on the side, due to their huge ownership in real state properties. Real state in some places in europe is quite solid, specially because people are starting to distrust their currency and buy real state as a hard asset whose value, they consider more solid than currencies that pay almost no interest and that have an inflationary risk and a sovereign debt risk associated. In a worse case the euro could collapse, so people, in Belgium for example, are spending their money on buying houses or remodeling them. My wife, who is in Belgium at the moment told me that it’s all over the news over there. Even in Germany they are starting to talk about a real state bubble.
The company seems to be growing nicely internationally in eastern and central Europe and Asia, specially south Korea. On the negative side it has had troubles to expand in the USA and their like to like comparisons in the UK are negative due to a lot of competition who has been investing in their market in the recent years. Also their guidance for 2012 has been lowered due to the competitive situation in the UK, their main market. Nonetheless, at a 9 P/E the stock seems quite cheap, the debt is small, and their international growth and real state assets, as well as a very attractive UK dividend of almost 5%, non taxed for foreign investors, seems to offer a lot of protection and make it a very safe investment at what seems to be quite an undervalued price.
I was disappointed to have to pay a 6 pound commission to my broker (Interactive Brokers) plus a 2.5 euros commission to buy the 800 pounds I needed, but I knew about those costs, what took me by surprise was an additional 0.5% (4 pounds) stock transaction commission. All those costs could have been eliminated by buying the ADR (which would only cost me 1 dollar up to 200 stocks via Interactive brokers!), So next time that is what I will do if I decide to keep on adding more stocks at the current prices, which I will probably do, once I read more about the company, if I do not find any significant risk.
Since the UK tax on buying stocks was implemented trading volume fell and people switched to buying derivatives and ADRs which are exempt from the tax:
Although the British stamp duty raised about £800 million per year, it did lead to a number of market responses designed to avoid the tax. Bearer securities grew at the expense of registered securities. To some extent, investors switched from equities trading to trading in equity derivatives that provided a similar return. Investors also increasingly used American Depository Receipts (ADRs) which allowed British active nominees to trade assets on American stock markets without incurring British registration duties.
Source: http://publications.gc.ca/Collection-R/LoPBdP/BP/bp419-e.htm
So definitely next time Ill go for the ADR, just as I did with Munich Re to avoid all the charges detailed above and pay instead only 1 dollar on the ADRs!
Note that despite this costs it is quite attractive to buy UK stocks in the sense that the dividend is fully paid. And stocks like Tesco pay a big one, basically you recover the 0.5% you paid on the tax with the first dividend due to what you save on the exempted dividend retention. So if you manage to buy the ADR you save a lot of costs (the tax, the bigger commission and the foreign exchange costs to buy pounds) and get paid a full huge non taxed dividend while buying a cheap and good company.
Cheers!
jrv
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Hi Jrv,
How are you dealing with the fluctuation in the exchange rate as it could impact your gains? Do you hedge by opening a currency pair position?
Thanks.
Depends on which currency and my view on it. In the case of the dollar, when I buy US stocks, I either buy dollars or I get indebted in dollars.
In the case of US dollars I take sometimes debt, which is collaterized by euros. I do that specially when the dollar is strong, which fortunately has coincided when stocks were cheap, due to the flight to safety. Fortunately because in that case when I cover the debt the dollars have lost value.
When I think the dollar will get devalued and the interest rate is less than the rate I get with my euros I generally prefer not to get rid of my euros to buy US dollars.
In the case of Tesco I bought pounds in order to cover the pound debt I incurred when I bough the shares. But I bought those pounds quite some time after buying Tesco, when the pound had lost some value.
So indeed, I have to manage the currencies of my underlying stocks. If I think the currency has a weak future I consider taking debt on it (specially if that debt is cheap), otherwise I buy it.
Cheers!
jrv