Over the past six months, the Woolworths Limited (ASX: WOW) share price has rallied 15% while Wesfarmers Ltd (ASX: WES) shares are flat.
Woolworths shares versus Wesfarmers shares
Woolworths
Over the past three years, Woolworths shareholders have been on a rollercoaster ride. In that time, shares have fallen around 27%.
Until recently, the problem for Woolies shareholders was that management appeared hell bent on widening the company's profit margins at the expense of customers. Prices of everyday products moved higher.
Meanwhile, Wesfarmers' Coles and Aldi were there to steal customers away from Woolies. In addition, a struggling — and failed — Masters home improvement business cost the company billions. I think Masters was a good idea but it wasn't executed well at all.
Looking ahead, the company has a new management team and is taking the fight to Coles and Aldi with lower profit margins.
Wesfarmers
Wesfarmers' last few years has been a case of 'steady as she goes'. With shares mostly flat over the past three years, Wesfarmers' Coles, Bunnings Warehouse, Kmart and Target have been well ahead of the competition.
However, there may be cracks starting to appear in the company's growth strategy. Most recently the company's Industrials business, which includes a coal business, kept the company's financial's afloat. Profit from Coles, which accounts for 38% of the group's total, went backwards. In my opinion, the problem with commodity prices is that they are virtually unpredictable. Therefore, I don't think the coal-fired profit hit (pun intended) is sustainable.
Don't get me wrong I suspect Wesfarmers shares will continue to trudge ahead. However, I also think growth will be slower, so investors must ensure they do not overpay for its shares.
Buy, Hold or Sell
The Wesfarmers share price is a little expensive for my liking while Woolworths shares now appear to be back around fair value. I think both companies would be great to own, but at the right price.
Remember, as can be seen in the chart above, they are not immune to big share price falls, so keep a cash balance handy and load up when they are down and out.
