Are Woolworths Limited shares a bargain at $24?

Woolworths Limited (ASX:WOW) shares may not be a bargain at $24.

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After an 18% rise in the Woolworths Limited (ASX: WOW) share price over the past six months, is it a bargain at $24?

Source: Google Finance
Source: Google Finance

According to the majority of analysts surveyed by The Wall Street Journal, the Woolworths share price remains above their fair value. That's despite the company's share price already falling from over $38 in early 2014.

Are the analysts wrong?

Doing what everyone else does will get you average results — at best. Shrewd investors are not afraid to stick their neck out from the pack and bet against the consensus.

After all, how bad can it be? Woolworths is still one of Australia's leading supermarket operators with a sophisticated supply chain and advantages over many rivals.

And now that the company's senior management has been shown the door, with Masters Home Improvement stores following them, there is an argument to be made for the next chapter of the Woolworths story.

More to win or lose?

Investing is a game of odds. You want to bet on opportunities in which either the reward outweighs an equally likely risk, or take bets in situations in which there is a much lower probability of failure than success. It sounds simple, right?

In the case of Woolworths we need to think about the upside and the downside. To me, the raw upside isn't that impressive. For example, even if it gets back to dominating supermarkets, Woolies will not be able to sustainably widen its profit margins because Coles – owned by Wesfarmers Ltd (ASX: WES) – and Aldi will keep it honest to consumers. Indeed, the best case, in my mind, is that Woolies returns to growth — but it will be anaemic.

On the flip side, the worst case, Woolworths' market share continues to erode with Aldi, Coles and even Amazon continuing to capitalise on its apparent falling asleep at the wheel. I think that the downside is larger than the upside and probably just as likely.

Buy, Hold or Sell

Based on this basic payoff profile, I do not think Woolworths is a bargain at $24. And if we go one step further and think of an investment in Woolies relative to all the other opportunities on the ASX, I think our investment dollars are better spent elsewhere.

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes -- and encourages -- your feedback on Google+, LinkedIn or you can follow him on Twitter @ASXinvest. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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