Shares in leading supermarket retailer Woolworths Limited (ASX: WOW) have never been as high as the level reached in the past month few months. In fact the whole time since the year 2000 has been a superb time to own the stock, with the share price having gained a whopping 580%.
Despite the amazing capital gains achieved which have provided outperformance against the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) of approximately 500% since January 2000, recent news from the UK should force Woolworths' shareholders to pause for thought….
UK-based Tesco – the world's third largest supermarket retailer – has announced a profit downgrade and its worst sales figures in 40 years amidst "challenging" trading conditions. Tesco's results could well have implications for Australian investors, given the cause of Tesco's profit slump appears to be heightened competition from discount-supermarket chains such as Aldi.
Just as Aldi has encroached on Tesco's markets, the German-based company has also been making inroads into Australia too. Aldi opened its first store in Australia in 2001 and now has a strong representation down the eastern seaboard with over 300 stores. Of greater concern to incumbents is that there is scope for plenty more Aldi-branded stores to be rolled-out across the country. Shareholders in Metcash Limited (ASX: MTS) already understand the effect that increased competition can have – the IGA-banner owners' shares are languishing at decade low levels. The concern is that Woolworths could be next!
Shareholders in Wesfarmers Ltd (ASX: WES), the owner of the Coles supermarket chain, are not immune either. Coles could face thinner margins from increased competition, however at least Wesfarmers has the protection of a diversified portfolio.
Don't fall in love with your stocks!
A key factor to investing successfully is to never 'fall in love' or 'anchor' to your stock holdings. Remaining level headed and independent in your assessment of a company's outlook can save you from holding onto a declining business. As economist Maynard Keynes once said: "When the facts change, I change my mind."
