Warren Buffett is arguably the worlds most successful investor, and he rarely invests outside the US. So when Buffett took a stake inTesco(LSE: TSCO) it was widely considered to be a vote of confidence in the companys management and long-term success.
Unfortunately, Buffetts Tesco trade turned out to be, in hiswords, a mistake but why Buffett actually decided to sell was unclear, until recently.
Management issues
Tescos accounting issues and sliding sales were the main reasons that pushed Buffett to sell his entire Tesco stake but he actually started to reduce his position a year before.
Indeed, the Oracle of Omaha sold a small chunk of his Tesco shares during 2013, after he started to sour on the companys management. At the time, Tesco was being led byPhilip Clarke, who was appointed during 2011 just after Buffett started to build his position.
But Buffett didnt sell his whole position immediately, a mistake that cost him over $400m.
Moving on
The past is the past and Tescos turnaround is now well under way and the groups management team has been completely reorganised. In particular, around half of Tescos senior management team has been replaced since this time last year and new board members, as well as new ideas, are starting to drive change.
But can Tescos new senior management team, led by CEO Dave Lewis, be trusted to turn the company around?
Well, if the past few months are anything to go by, Dave Lewis is the right man for the job. You see, in the past few months there have been many revelation about Tescos toxic corporate culture and bureaucratic management structure.
These two traits were previously hidden away from shareholders, but now they are out in the open, Dave Lewis can get to work changing the companys corporate behaviour for the better.
A different company
Warren Buffett may have been won over by Tescos management during 2011 but as it turns out, management were hiding a lot, including a toxic corporate culture.
Now Tescos troubles are out in the open and the company is trying to change. Over the long term, theres no doubt that this change of strategy will put the company in a better position to win over customers and drive sustainable sales growth.
Overall, Warren Buffett may have sold Tesco but, as the company changes, theres no reason that you should do the same.
Still, Tesco is trading at a 2017 P/E of 17.3, a high growth multiple more suited to a fast-growing tech company, rather than a struggling retailer.
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Rupert Hargreaves owns shares of Tesco. The Motley Fool UK owns shares of Tesco. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
