New probe rocks Tesco - tread carefully

There was always a massive risk that Tesco shares would get cheaper before any upturn in fortunes; we warned as much last week. And so it has proved. Now, the City watchdog has got involved and the slump continues. The unloved supermarket is a classic "falling knife" stock - it's dangerous and you risk getting hurt.

In a short statement Wednesday, Tesco said it had been notified by the Financial Conduct Authority (FCA) that it has launched a full investigation following the overstatement of expected profit for the half year by an unbelievable £250 million, flagged up by the retailer on 22 September.

Tesco chiefs, who have already called in Deloitte to undertake an independent forensic analysis of internal failings, promised "to co-operate fully with the FCA and other relevant authorities considering this matter."

We'll get an update on the 23 October when new boss Dave Lewis talks us through his first half-year results since joining a month ago.

And Tesco must be worried given that the FCA has been flexing its muscles at similarly beleaguered rival Morrisons. On Monday, the regulator charged Morrisons' former treasurer and head of tax Paul Coyle with insider dealing. He's accused of buying shares in online grocer Ocado ahead of a game-changing distribution deal with Morrisons.

"The shelves of worry continue to be stacked at the UK grocers and share prices are reflective with ugly downward trajectories," warns Mike van Dulken, head of research at Accendo Markets. "Could accounting issues be widespread? Can we trust the fat cats at the big names we shop from? Are the discounters winning? What does the future hold for the traditional 'big shop'?"

Tesco's share price is down another 3% at 180p, its lowest since spring 2003, but it's impossible to see where a catalyst for any recovery will come from. Sales are down, the dividend has been slashed, two investigations are underway, and both the chief executive and finance director have only just joined. Even a punt by Sports Direct boss Mike Ashley, which effectively pays out if Tesco shares do not fall further, has failed to stop the rout.

At 180p, Tesco still trades on 10 times earnings per share (EPS) forecasts for 2015, on a par with Sainsbury's. Tread very carefully.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.