Why doesn't Neil Woodford buy Tesco plc shares?

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Tesco sign

Neil Woodford famously dumped his Tesco(LSE: TSCO) shares, as did Warren Buffet, back in 2012 when the problems with the UK's biggest supermarket giant started to emerge.

And in 2014, he told the BBC that it could be a long time before he'd invest money in Tesco again (or any of its sector rivals). He ppoke of of a double-whammy of cyclical problems combined with the long-term lowering of margins as a result of the onslaught from cut-price competitors Aldi and Lidl. He said: "The industry, in my view, faces a long road to exit this period of depressed margins and crushed profitability. The immediate future is going to be very tough for the sector but particularly for Tesco."

But Tesco has been coming good, it seems, and on 12 April reported its first year of like-for-like sales growth in seven years -- only a 0.9% rise in the UK, but food sales were up 1.3%, and it's a welcome halting of that multi-year slide. And though reported profits were still significantly down, the company did record a 41% rise in underlying pre-exceptional earnings per share.

There's no dividend yet, but even that should be back on the table in the coming year if City forecasters are anywhere near the truth.

Shares still moving

The up-and-down share price, however, has not responded well, and the chart for the past couple of years still looks like a line of camels in the desert. Stuck at around the 175p level, and on a forward P/E of above 18, where are the shares likely to go next?

My colleague Roland Head has suggested a share price of around 300p could be achievable by 2019/20. And though my initial reaction was one of serious doubt, he does make a good argument, and a figure like that just might be realistic.

Would Neil Woodford be convinced? I wouldn't dare try to tell you what such a great investor should do -- he's the one trusted with the big funds, not me -- so this is entirely speculative.

But my take from following his picks is that he tends to go for companies that are leading their sectors (mixed in with smaller growth candidates that have great long-term potential). Take GlaxoSmithKline and AstraZeneca -- they're obviously the big two in the UK's pharmaceuticals sector, and there are no Lidl-like upstarts snapping at their heels and threatening to tip them from their perches.

Then we have British American Tobacco and Imperial Brands, also the big fish in their local pond, with such competitive advantages that no small fry can come close. And those four companies account for 31% of Mr Woodford's Equity Income Fund.

Really not the best

Looking back a few years, I'd have placed Tesco in the same elevated company. At the top of its sector, with all the competitive advantages, succeeding at global expansion like no other... until the groceries business was radically upended and those tasty big margins were gone forever.

Tesco is just not leading the business any more. That's being done by Lidl and Aldi. And by online shopping, which is even more convenient than those massive out-of-town superstores.

No, I don't see Tesco as a Woodford stock just yet. But should the day come when he does get back in, that will surely mark Tesco's successful rehabilitation. 

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca and Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.