In May 2014, shareholders of Woolworths Limited (ASX: WOW) were rightfully celebrating as their stock rose to a new all-time high of $38.92, capping off a market-smashing 55% rally since the beginning of 2012.
A little over 12 months on and the scenario has completely changed. The stock is now fetching just $27.97, down 2% for the day and 26% for the year, heavily underperforming the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) and rival Wesfarmers Ltd (ASX: WES) in that time.
Indeed, the fall has largely been justified, too. Woolworths' Masters Home Improvement chain has been a disaster thus far and looks to be a long-way off from competing with Wesfarmers'-owned Bunnings, while growth in its core supermarket division has also consistently underperformed that achieved by Coles, which is also owned by Wesfarmers.
What was once considered to be one of Australia's most reliable companies now has big question marks hovering over its head, highlighted by recent data from ASIC which shows that it remains one of Australia's most heavily shorted stocks.
While that could have ramifications for Woolworths' shares in the near future; the attention the stock has received from the market's bears recently has actually created a fantastic opportunity for long-term, 'Foolish' investors to make their move.
Here are three reasons why Woolworths could make for an excellent purchase right now.
- It'd be fair to argue that most of the pain has already been baked into the share price. Indeed, Woolworths is one of the most covered stocks on the ASX, meaning that any news (whether it be good, or bad) tends to get processed by the market more efficiently than stocks which do not receive such wide coverage.
- The market is also very short-term oriented and appears to be punishing Woolworths for its decision to revamp its supermarket division. Indeed, the redevelopment and restructure could cost north of $1 billion which will certainly impact near-term earnings, but it could also improve costs and efficiencies considerably moving forward, thus making it more competitive against Coles and various other rivals.
- Speaking of other rivals, investors are also concerned about Woolworths' ability to fend off the rapid growth of discount retailers Aldi and Costco. While these entities do represent legitimate threats, they do not enjoy the same scale that Woolworths and Coles do, nor do they offer the same level of convenience or array of products for sale.
Of course, Woolworths shares could remain volatile for some time but at today's price, they are looking like a reasonable purchase for investors willing to remain patient. While they wait for the rewards to be seen in the company's share price, they can enjoy its generous 5% fully franked dividend yield, which equates to a 7.1% yield grossed up.
