Here's why you should hold your Woolworths Limited shares

Short sellers and options traders are betting against Woolworths Limited (ASX:WOW) in record numbers. Should you?

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As reported by Fairfax media during their market wrap segment yesterday afternoon, options traders and short sellers are betting against Woolworths Limited (ASX: WOW) in record numbers.

In fact, 'short' positions – betting that shares will fall – are close to the highest on record at 6.9% of outstanding stock.

You can definitely mount a strong case for selling your Woolworths shares, but here's why you need to hold on:

  1. Masters Hardware

I don't know if I need to explain any further. Shareholders are worried that Masters is turning into a giant money sink, with no payoff in sight.

What they don't realise is, Wesfarmers Ltd (ASX: WES) built its competing Bunnings Hardware franchise steadily over the better part of a decade – and Woolworths is trying to knock together a fierce, nationwide competitor overnight.

That takes major investment, and it's almost lunacy to think that a management team could overnight throw up a competitor to an entrenched business (Bunnings) that has had more than a decade to build a skilled management team and iron out the kinks.

It doesn't appear that Bunnings inherently has a competitive advantage in terms of product or service that Masters can't equal in time. Rather, patience should be the order of the day.

  1. Aldi

This is an interesting one.

First off, Aldi won't ever replace Woolworths or Wesfarmers-run Coles stores. Their small store offering simply can't replicate the choice available at Coles or Woolies.

However this makes them leaner and more competitive – with lower staff costs, lower overheads, and low-cost imported goods allowing for cheaper prices.

Not to mention the value gained through stocking only regularly purchased, high volume items that simplifies the ordering process and cuts back on waste whilst maximising buying power.

While this is fantastic for entering a market, Aldi lacks a lot of domestic advantages in terms of location (Woolworths and Coles controlling the best sites) and Aldi has obvious shortcomings in terms of range and product variety.

Woolworths and Wesfarmers can also invest further in their supply chain by bringing more grocery production 'in-house' – investors should expect to see more of this if the ACCC permits.

  1. Everyone says you should sell Woolworths!

Well, I guess you'd better panic and sell then, right?

Wrong. Even though short positions are near record highs and 10 of the 16 analysts tracked by Bloomberg are reportedly recommending clients sell Woolworths shares – every investor should think twice before blindly following these so called independent recommendations.

Even ratings agency Standard & Poors has been known to follow market perceptions rather than providing truly independent analysis.

Have you ever noticed that the amount of people calling for a stock to be sold rises as share prices fall?

Even though it should be the opposite, because as prices fall a company moves closer to its 'real' value and thus there should be less people clamouring to sell it, not more.

Don't fall victim to this kind of group think.

I can't see any compelling reason to sell Woolworths shares – although it's true that, due to the difficulties, I'm not diving straight in either… Lower prices or signs of an improvement will be required to tempt me.

One stock I am strongly considering buying today is a well known but little-traded ASX tech stock.

A household name, in fact, with powerful competitive advantages, but still undervalued given its market dominance and ambitious plans for overseas expansion.

To find out more, simply click on the link below and enter your email address – it's completely free – to receive the inside scoop on TMF's Top Stock Pick for 2015!

Sean O'Neill has no position in any stocks mentioned. The Motley Fool 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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