What Price Four Scandals?
LONDON -- FTSE 100 investors have had more than their fair share of shocks recently. How have they fared after the dust settled?
The year started badly when Tesco (ISE: TSCO.L) issued its first profit warning for 20 years on Jan. 12. The shock prediction of flat profit growth for the next year caused the shares to drop 14% in one day. At 340 pence, they have barely recovered and are well below January's 411 pence high.
It has been a long fight back, with focus directed at the U.K. grocery offering, which has been neglected in favor of international expansion and new store openings. Amid an aggressive promotional campaign, there are early signs that this is working. According to retail analyst Kantar Worldpanel, Tesco's market share increased for the first time since the profit warning, from 31% to 31.4% in the four weeks to Aug. 5.
Then, on June 27, Barclays (ISE: BARC.L) dropped a bombshell by announcing a 290 million pound settlement over the manipulation of LIBOR. What initially looked a PR coup quickly turned into a disaster, and Barclays' shares dropped 16% over the next two days.
The fallout has seen the loss of Barclays' chairman, chief executive, chief operating officer, and the chair of its remuneration committee. The future of Barclays as a universal bank has been called into question. New chairman David Walker has made clear that he wants to rein in the scale of the investment bank, as well as the remuneration of its highfliers.
Surprisingly, at 198 pence the shares are back above where they were immediately before the scandal broke. That may reflect its cheap valuation -- about half tangible net worth. But it's hard to believe that the damage done to the bank can be repaired quickly. Investment banking brings in half of Barclays' profit. It will take more than a new chairman to squeeze the same return from a smaller, less freewheeling, poorer-paid investment banking division.
Less than a month later, on July 12, home secretary Theresa May revealed that G4S (ISE: GFS.L) would be unable to provide all the security guards promised for the Olympic Games. G4S's shares fell back 17%, and at 270 pence they're still well short of their pre-debacle price of 290 pence. G4S is left with three unfortunate Olympic legacies.
Firstly, its reputation has been hit and its management undermined. It remains to be seen whether CEO Nick Buckles, who played a major part in G4S's growth, will survive.
Secondly, it lost some contracts. It declared it would not bid for the 2014 football World Cup or the next Olympics, and a number of police authorities promptly said they were reconsidering outsourcing deals.
More broadly, some in the public sector have used the fiasco to lobby for outsourcing to be scaled back. This seems to have hit home, with culture secretary Jeremy Hunt and defense secretary Philip Hammond both calling for a rethink.
The crisis that threatened the very existence of Standard Chartered (ISE: STAN.L) broke on Aug. 7 while both its chairman and CEO were on holiday. The New York Department of Financial Service's inflammatory accusations drove the shares down by more than 25%.
They swiftly recovered about half of that loss as realization dawned that the risk to its New York banking license was minimal. Relief over the swift 250 million pound settlement pushed the shares up further. At 1,431 pence, they are now about 11% below their pre-scandal price.
To my mind, that represents a loss of Standard Chartered's premium rating. Though the allegations against it were ramped up, there was some substance that suggested management had sailed closer to the wind than investors would have expected.
It is surprising that of the four shares, Barclays is the one to have recovered. But it is not a recovery I would have much faith in. For my money, Tesco is the share with the best long-term prospects. In that I'm in good company. Tesco is one of legendary investor Warren Buffett's rare foreign investments, and he topped up his holding to more than 5% after its profit warning. However, Tesco's investors will need to share Buffett's patience. You can read more about the one UK share that Warren Buffett loves in this free report from the Motley Fool.
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The article What Price Four Scandals? originally appeared on Fool.com.Both Tony and The Motley Fool own shares in Tesco and Standard Chartered, but no other shares mentioned in this article. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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