Shares of Woolworths Limited (ASX: WOW) fell 20% in 2015, underperforming the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) by around 18%.
For some, a wide margin of underperformance is a reason to run the ruler over a potential investment in the hope of securing a bargain. In certain circumstances, however, it can be like catching a falling knife.
According to The Wall Street Journal, nine of the 16 analysts surveyed have an 'underweight' or 'sell' rating on Woolworths' shares. Currently priced at $24.53, the consensus fair value among analysts is $24.90. That means, the majority of analysts are avoiding shares in Australia's largest supermarket operator.
Is Woolworths buy in 2016?
Going against the crowd, however, can produce the greatest returns for investors. Indeed, if you can distinguish between market 'noise' and facts, you could unearth an undervalued share.
Despite frequent patches of irrationality, however, share prices follow profit over the long-term. Unfortunately, for a company as large as Woolworths, turning around three consecutive profit downgrades is easier said than done.
Firstly, Woolworths' share price woes in 2014 and again in 2015 can be traced back to not only an underperforming supermarket chain but also the company's struggling Masters Home Improvement business and Big W. These businesses are facing stiff competition from strong local and international rivals.
Wesfarmers Ltd (ASX: WES), which owns Coles, Kmart, Bunnings, Officeworks and more, is grabbing land from Woolworths on almost every front. Together with an impending appointment of a CEO, Woolworths Chairman Gordon Cairns has many important decisions to make in 2016 if the company is to turn itself around in the short term.
Also, digital disruption, Aldi and Costco, present longer term challenges for the group.
Foolish takeaway
Warren Buffett, the world's greatest investor, famously quipped, "turnarounds seldom turn." On a personal level, in 2015, I believed Woolworths shares looked cheap. 15% in capital losses later, I now know I was hasty – and perhaps wrong altogether.
Hindsight is a great thing, but avoiding losing investments is even better. Therefore, with many questions yet to be answered by the team at Woolworths, long-term Foolish investors may want to look elsewhere for big dividend stock ideas…
