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Should you sell your Woolworths Limited shares?

I bought shares in Woolworths Limited (ASX: WOW) for my family’s portfolio early in 2015 because I thought they looked decent value. I disobeyed one of my stock-picking rules which require me to a have a wide margin of safety – at least 30%.

A margin of safety is the difference between what you think a stock is worth (e.g. $30) and the market price ($25). You want that margin ($5) to be as wide as possible, to adjust for any errors you may have made in estimating the company’s worth. I neglected that rule.

I estimated the worth of Woolworths’ shares lay somewhere between $26 and $28, based on rather bullish assumptions – although they didn’t seem too bullish at the time.

Another profit downgrade, restructuring and heavy investments in ‘price’ gave me some reasons to reassess my investment thesis. A new marketing campaign is well underway, so too is the search for a replacement CEO. Further, the board has undergone a spruce up, the loyalty rewards deal with Qantas Airways Limited (ASX: QAN) has come full-circle and a deal for Big W could be on the table.

All-the-while Masters remains unprofitable (although it is showing signs of life), and Aldi and Costco continue to roll out their low-cost supermarkets across the country.

It’s clear now that Woolworths’ management were complacent over the past five to 10 years. Lead rival Coles, owned by Wesfarmers Ltd (ASX: WES), didn’t take its eye off the prize and is kicking goals.

Is Woolworths a sell?

In light of recent events, Woolworths shares do not appear a compelling investment. However, if you sell, there is a risk that Woolworths’ share price will plateau while management scramble to stymie the losses and resurrect the company’s underperforming businesses.

My family’s portfolio is currently 21% down on a meaningful position that is Woolworths. Obviously, I don’t like to see the red ink and the idea of cutting my losses and moving on, is certainly appealing. I wouldn’t criticise anyone for selling their losers and letting the winners run, and I may indeed do the same in coming weeks.

After all, there are plenty of other quality dividend stocks on the ASX.

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Motley Fool writer/analyst Owen Raszkiewicz has a financial interest in Woolworths. 

Owen welcomes your feedback on Google plus (see below), LinkedIn or you can follow him on Twitter @ASXinvest.

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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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