The stock market is now valuing Tesco as an average company. It is anything but. So why has its share price fallen 16% in recent months?

In these troubled times for the stock market it's surprising that the industry bellwether, Tesco, has struggled more than the average company. Its shares declined 16% in the three months to last week. In that period, the market only fell 8%. This month I'd like to investigate why this has happened, and why the fall is not justified.

The Tesco share price has suffered pressure for both technical and fundamental reasons. Just by virtue of its size and liquidity, some investors will have sold Tesco shares: it is the biggest and easiest to trade of the food retailers (in fact of all the retailers) and any fund manager shaving his holdings in this part of the market may well look to Tesco as an easy means of taking some money off the table. Pretty unsophisticated management of money I grant you. But it happens.

Food retailers are generally by their very nature "defensive". If there is a consumer downturn, the supermarkets will be impacted less than the other consumer stocks... everyone has to eat after all. So normally Tesco should be expected to hold up well in share price terms as the market wobbled. Or should it?

The market won't allow Tesco to have it both ways. Part of the very strong share price run of recent years has been down to Tesco's increasing exposure to higher growth non food areas. When those growth areas slow, it makes sense that those companies exposed to them should see their shares come under pressure. Tesco can't be a "general" retailer when the going's good, and a "food" retailer when the consumer looks set to retrench.

And the market is not as confident about the makeup of the food retail industry as it was 3 months ago. Back then it looked odds-on that Sainsbury would fall into Qatari hands (would Morrisons follow suit and become private equity-owned?).

Had this happened, it would have been great news for Tesco as its main opponents moved their focus to the bottom line and away from sales growth, thus allowing Tesco some easy market share gains. The market is now starting to doubt this is the way things will pan out. The continued noise about price campaigns has also generated a few nerves.

So the market has picked on Tesco and sold its shares due to its liquidity, its exposure to non food and the non-emergence of a bid for JS from Qatar. Minor reasons for gentle underperformance perhaps. Not eight points worth.n

Jonathan Pritchard, Partner, Oriel Securities

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