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.
