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Is Woolworths Limited a top share for 2016?

Credit: Scott Lewis

Backing up a very tough 2014 calendar year, Woolworths Limited (ASX: WOW) shareholders will cap off 2015 with another very poor showing on their investment.

With Woolworths’ share price down 18% this year, so far, is there any hope for shareholders in 2016?

Competition catching complacency  

The writing has been on the wall for some time in Woolworths’ all-important supermarkets business. Accounting for the vast majority of Woolworths’ profits, the board of Australia’s largest supermarket operator got complacent with its leadership and management oversight responsibilities in recent years. Now, current shareholders are paying the piper.

Indeed, while foreign low-cost rivals Costco and Aldi have made inroads for the Australian market, so too has Australia’s second largest supermarket operator, Coles – owned by Wesfarmers Ltd (ASX: WES).

Diworsification

Unfortunately, Woolworths’ other business lines, such as Big W and Masters, have been little help in getting the broader group’s profit to pass muster. A revamp of Masters and the potential sale of Big W, however, may be potential key catalysts for investors in 2016.

(coming soon) ‘Leading by example’

In recent times, the company made sweeping changes to its top level of management in an attempt to restore investors’ confidence in the company. Unfortunately, the market still appears to be eagerly awaiting a more meaningful shift in strategy, especially within the supermarkets business.

Valuation. Valuation. Valuation.

A fall in supermarket profits continues to have a meaningful impact on group profit. Retrospectively, it’s evident profit margins of 7% in supermarkets are unsustainable.

The bottom line for Woolworths’ share price is that a reversion to the mean in the supermarkets business could dictate that its shares are — even now — a little expensive to justify a buy rating.

A better buy than Woolworths

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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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