A new way to research shares in the grocery sector. I have compiled several techniques to give you an early warning signs when stocks turn adverse or appreciate in price.

1. I will teach you how to invest in
the grocery sector
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2. Most investors would look at revenue and
profits to determine the fundamentals of a
grocery company (or any other company
for that matter).
Some would identify ‘short-term’ trends,
such as Sales growth, like-for-like sales or
transaction value per basket.
Others will look at the share price of businesses
and determine when to buy the company’s stock
(see below).
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3. Confused? Or, is there a pattern telling us
when to buy?
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4. Pattern or no pattern in this presentation,
you will learn:
1. The best indicator to track a grocer’s
share price performance.
2. The best combination of two indicators
coming together that will tell you to sell the
shares early, and, when to buy them.
3. Then there are things beyond our control.
No metrics, charts, and sometimes
fundamentals will affect the grocer’s market
value adversely, or favourably. 416/06/2015

5. Which metric is best predicting the
share performance of a supermarket
‘grocer’ share price?
The market share of the grocery sector,
especially their most established market.
You may have figured out in slide 3, I am using
Tesco, Morrison and Sainsbury.
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6. The most effective indicator
Morrison’s MC Vs. Market share
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7. The most effective indicator
Tesco’s MC Vs. Market share
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8. The most effective indicator
Sainsbury’s MC Vs. Market Share
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9. The most effective indicator
(Explained)You may have
noticed:
A lagging effect on W Morrison’s chart between 2002-07
that is because it bought Safeway (another grocery
company in the UK) back in 2003/04. The immediate
increase in market share from 5.7% to 14.8% represented an
opportunity to buy W Morrison’s shares.
Here is why:It’s market value were behind the curve and this big
divergence between MC Vs. MS needed to be closed.
So in 2003, you could have bought Morrison for under
£3bn or £1.25/share and in four years, the shares would
exceed £3/share or £8.1bn.
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10. On the other hand, if the market value exceeded what was
permitted, then the company is overvalued, purely based on
the market share it holds.
More recently, Tesco and W Morrison’s saw its grocery
market share decline, at the same time its share price
depreciated greatly.
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11. We had the most reliable indicator. Now let’s talk
about the second most reliable.
The ‘inflation-adjusted’ sales is grocery sales being
discounted by UK inflation.
Using UK inflation data from the National Audit Office, I
adjust the grocery’s sales by multiply the loss of purchasing
power of money from the base year. For Tesco and
Sainsbury, that is 1993, and for W Morrison it was in
1998.
See for yourself:
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12. W Morrison’s chart
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13. Tesco’s chart
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14. Sainsbury’s chart
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15. Market Capitalisation Vs. ‘Inflation-
adjusted’ Sales (Explained)
If sales were not inflation-adjusted and we took Tesco,
Sainsbury and W Morrison ‘SALES FIGURES’ at
face value, then all the graphs would show sales in an
upward trend Vs. a declining market capitalisation.
With ‘inflation-adjusted’ sales,
we get:
1. A strong pattern signal.
2. An early warning signal.
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16. In the Sainsbury’s chart, the correlation is not so
obvious because sales in ‘real terms’ have been
declining since 2000, but its market valuation has
been trading sideways.
That is due to Sainsbury’s grocery market share
in the sector being stable (see slide 8), and an
increase in operating profits year after year since
2005 acted as support from further devaluation in
its value.
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17. What happens when a grocer took on debt?
We can go on and on about the good and bad things
that are debt.
But one thing is clear, debt can be backed by
tangible assets (land and property). It gives the
impression when a company incurs debt; it would just
sell the tangible assets to pay it off.
The grocery sector, tangible assets are in
abundance, even if you deliver grocery online (think
warehouse!). However, one needs to look at its
profitability and its rivals to gauge whether these
‘tangible assets’ can be sold at face value or a
discount.
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18. Tesco’s market cap. Vs. Gross debt
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19. W Morrison’s Market Cap. Vs. Gross Debt
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20. Sainsbury’s Market Cap. Vs. Gross Debt
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21. The charts above are inconclusive, as investors
have different views on a business loading up
debts on its balance sheet.
But, despite, the inconclusiveness, there are three
outcomes:
1. Leveraging up is good;
2. Leveraging up is inconclusive;
3. Leveraging up is bad.
Each and every company responses differently when
leveraging up. That is good in itself because we should know
beforehand if leveraging up would be adverse, or favourable
to the business.
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22. EARLY WARNING CHART +
INDICATOR
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23. Earlier I’ve alluded that the Market Cap. Vs.
‘Inflation-adjusted’ Sales chart acted as an
early indication to sell a company’s stock.
And it’s a pretty effective indicator, as it gives
the investor some years to sell their shares
before a big decline ensue.
But there is one more early indicator with 4
combination graphs telling investors to get out:
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24. Morrison’s chart with combination of 4 different
graphs
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25. Tesco’s chart
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26. Sainsbury’s chart
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27. By combining the Market Capitalisation Vs. Total
Liabilities Vs. Tangible Assets Vs. Cash it tells the
story of a company’s business operations and the
funding requirement to achieve a higher return.
Interpreting the concept as follows:
1. Cash and tangible assets rise in proportion of
liabilities causing financial leverage to remain
stable, as the company grows its cash profits; -
Likelihood of the share price rising.
2. When cash and assets fall, but liabilities
increases, which will increase financial leverage
meaning higher interest payments and the
likelihood of dividends cut; - Likelihood of share
price falling, or trading sideways (like
Sainsbury’s). 2716/06/2015

28. Lagging chart indicators – not so useful, but
validation of why and when you are right in
your assessment
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29. Lagging indicator number 1: Market cap. Vs.
Dividends + Cash.
W Morrison’s chart
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30. Tesco’s chart
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31. Sainsbury’s chart
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32. From both Tesco and W Morrison’s charts, the indicator is
lagging when the company’s market value fell before the
other metric started to fall (in this case, dividends and cash).
A business reason it’s a lagging indicator is dividends tend
to be the last thing management wants to cut back on
because of its adversity to the company’s share price.
Management would rather cut back expenditure, sell
assets, or even borrow money to pay the dividends to stop
shareholders from selling its shares.
That would only work if the sector only suffers a
temporary decline and recover quickly.
However, long-term deterioration would leave management
with no choice, but to cut the dividend.
The reasons
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33. Lagging indicator number 2: Market cap. Vs. Net
Asset per share
Sainsbury’s chart
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34. W Morrison’s chart
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35. Tesco’s chart
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36. It shouldn’t come as a surprise that the NAV is a lagging
indicator because any company’s management would want
to maintain, if not increase the value of its assets to
ensure the net worth of the business, even when profits
are down.
As the stock market measures the future, then it is no
surprise when shareholders and analysts start selling the
company’s shares, as sentiment and business weaken with
the lower operational performances being the likely
outcome!
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37. Lagging indicator number 3: Nominal (current) sales
Vs. Share priceSainsbury’s chart
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38. Tesco’s chart
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39. W Morrison’s chart
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40. Measuring a company’s sales against its share price wouldn’t
help your prospects in making a fortune.
Sales would be a lagging indicator if the company’s
management deemed sales as being an important metric to
their end of year bonus! And cutting prices to boost sales
would only hurt the company’s net margins and cash flow.
Therefore, the share price is unlikely to response positively.
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41. Cycle-investing
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42. 1. As long as earnings are positive, then a low
earnings yield will mean share price is expensive, and a
high earnings yield means share price is inexpensive.
2. If earnings yield is negative, the cycle of low and
high earnings yield is broken.
In fact, a negative earnings yield is accompanied by
a falling share price.
Can you time your investment in the grocery sector?
Yes, you can, only if normal business cycle resumes.
The Share price Vs. Earnings yield chart can provide
this answer, because:
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43. Sainsbury’s chart
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44. W Morrison’s chart
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45. Tesco’s chart
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46. As you may have noticed when earnings yield is negative in all
three charts, the share price turns downwards, this is because
the grocery sector has a thin profit margin.
A more established supermarket has all kinds of obligations
like pension contributions, operating leases, capex, dividends
and so forth.
So a loss-making year would be digging into the company’s
piggy bank or asking for financial institutions for more money.
TIP: Try using operating profit or EBITDA as a
substitute for net profit, if earnings become negative.
As seen in the Morrison’s chart, the metric is not fool
proof to work 100%, and depends on individual companies.
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47. Why has the traditional supermarkets been doing poorly,
as of late?
Because of these ‘new kids on the
block’:
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48. And how well did these companies perform? See below:
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49. These ‘Bad Boys’ has increased its UK grocery market share
by more than 10% in 16 years.
And if their businesses are performing great, who is suffering?
Its rivals, they’re your local corner shops, past discounters like
Kwiksave, and the big ‘four’ of TSCO, MRW, SBRY and
Wal-Mart very own Asda.
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50. Below showed the market share of TSCO, SBRY
and MRW in different periods:
They didn’t do too bad, and still their share price took a
smacking!!
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51. Disclaimer – Events making financial
metrics measures useless
External events will derail a company’s share price chart
pattern, or your analysis of the business because it is
‘unforeseen’.
So, your ‘buy’ recommendation becomes redundant when
it is being investigated for ‘misreporting’ their accounting
numbers!
Or, you put a ‘sell’ note because the company’s future
prospects don’t look too bright, and an outsider appears
to buy the business in the name of ‘synergy’.The grocery market is no different, here are some of the
events that came about for Tesco, W Morrison and
Sainsbury:
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52. 1. Sainsbury has a bid from Qatar Holdings at around 600
pence/share, but it was firmly rejected.
2. W Morrison acquired Safeway in 2003-04 leading to a
massive jump in its market share in the grocery sector.
3. And Tesco went around the world to set-up shop, but
quickly found out its business model do play well with the locals.
Examples are a quick exit from the U.S. and Japan, as well as
mounting losses in its Chinese operations.
However, earlier in the year, an accounting scandal came up
when it misreported its financial numbers.
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53. Finally, I hope you enjoy my slides.
If you like what you see and read, please check out my
website @ investeconomically.com , or follow me on
twitter @Wh_biz32.
Thank you for reading.
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