The share market is a funny place.
One second, everyone loves Woolworths Limited (ASX: WOW) and hates Telstra Corporation Ltd (ASX: TLS).
The next second, it's the opposite.
For example, in the first half of 2014, Woolworths' share price was up 7% but since June 30 has fallen 15.6%. All the while sales have grown and its reliable dividend yield – currently 4.5% fully franked – looks a whole lot better.
Yet it seems, in just six months, the market is unenthusiastic about the company's prospects moving forward.
Conversely Telstra – once Australia's most loathed telecommunications provider and serial share market underperformer – is now in vogue, as its share price continues to burst through record highs, driven by a growing mobiles division and an international expansion.
So could it be time to buy or are these two stocks best kept on your watchlist?
Woolies
Earlier this year I penned an article suggesting Australia's duopoly was under threat. Indeed no investment case for either of the two big supermarkets – including Wesfarmers Ltd's (ASX: WES) Coles – would be valid if it did not mention the two elephants in the room: Costco and Aldi.
In the next decade I believe Costco and Aldi will put more pressure on the profit margins of both Coles and Woolworths. Both foreign supermarkets are increasing their store count aggressively as consumers respond to lower prices.
Whilst Woolies does have a competitive advantage (afforded to it as a result of a sophisticated supply chain and presence throughout all of Australia), the question remains whether it is, or not, durable. In my opinion, it has a strong competitive advantage now but in 10 years, it won't.
Outside of its grocery channel, Woolworths' Masters home improvement chain is experiencing teething problems although it does provide growth potential over the long term. But its general merchandise businesses also play in an intensely competitive market and I wouldn't hold them in my portfolio if they were standalone businesses.
Now, I may be painting a bleak picture of Woolies' future but it's important to recognise the challenges it faces because until recently investors were pricing its shares for perpetual growth. That's not going to happen.
Indeed with Woolies stock at $30.00 today, I think it's now closer to fair value than it was six months ago. However it's no bargain leading into 2015 and beyond. Investors should exercise patience before jumping in.
Telstra
Telstra has performed much better than Woolies throughout 2014 and operationally appears set to continue doing so in 2015. However, just like Woolworths, Telstra is not cheap.
Yes, it'll be a significant beneficiary of demand for fast and reliable fixed and mobile internet-enable devices. However the benefit of holding Australia's biggest telecommunications stock (which pays a great dividend in a low interest rate environment) is reflected in its current market price.
Despite the recent share buyback improving earnings per share notably, it trades on a lofty earnings multiple and price-book ratio. Whilst I agree it's worthwhile paying up for shares in well managed and growing companies, I doubt it'll experience the kind of growth necessary to allow it to outperform the market in 2015.
However I am bullish on its long-term future, so although I wouldn't go so far to call it a 'sell', it's certainly not a 'buy'.
Foolish takeaway
As long-term investors, it's our job to find companies trading at a discount to their intrinsic value. Maximising the gap between these two figures is how we develop a margin of safety and reduce much of the downside risks.
The best place to find these types of 'bargains' is by focusing our attention on the market's worst performing stocks (e.g. Woolies) and exploiting discrepancies in price caused by the market's wild mood swings. However for this valuing investing strategy to work, we must be right when the rest of the market is wrong. We must also have conviction in our investment thesis. Two things which are much easier said than done.
I've said it a number of times before but I believe a good price to pay for both Woolworths and Telstra shares is at, or below, $25.00 and $4.00, respectively. Until then, they'll stay firmly on my watchlist.
After all, patience doesn't lose us money!
