I can’t believe it! Woolworths Limited shares are just $22

With the Woolworths Limited (ASX: WOW) share price slipping below $22 on Tuesday, many investors are asking:

Are Woolworths shares a blockbuster buy?

Usually, when a reputable blue-chip company with a dominant market position sees its share price sold down, bargain hunters emerge from between the cracks.

I, too, thought the Woolworths share price looked cheap not so long ago – and at a much higher price. However, a handful of key managerial decisions and a few profit downgrades later, and the Woolies share price sits more than 40% off its all-time high around $38.

Woolworths: A turnaround story?

After many months in a ‘downtrend’, the analyst community may finally be seeing value in Woolworths shares. Of the 16 analysts surveyed by the Wall Street Journal, three have ‘buy’ ratings on Australia’s largest supermarket operator, up from just one a month earlier. Eight analysts currently have ‘sell’ ratings on the shares.

The median Woolworths share price target now stands at $23.57 – a modest 7% premium to the current market price.

However, if the recent decline in the Woolworths share price has taught us anything it’s that these things take time, and, usually, get worse before they get better.

Going one step further, legendary investor Warren Buffett gives us some sage advice to perhaps avoid turnarounds altogether.

“Turnarounds seldom turn.” — Warren Buffett

Buy, Hold or Sell?

There’s an old saying in the share market that ‘share price follows profit’. But if the Woolworths share price is expected to (sustainably) resume its historical outperformance from today’s prices, I’m unsure where that profit growth will come from given the company plans to sell its Home Improvement business.

Indeed, the Woolworths supermarkets business gouged consumers for many years, at a time when Coles – owned by Wesfarmers Ltd (ASX: WES) – was focusing on customer satisfaction. Meanwhile, competitors such as Aldi and Costco made inroads into the local market. Looking ahead, the possible introduction of and Lidl pose further – long-term – questions of Woolworths’ management.

Again, without the Masters and Home Timber & Hardware businesses in its stable, Woolworths has its Big W, Dan Murphy’s and Hotels businesses. Unfortunately, none of these businesses I’d describe as ‘market beaters’.

Foolish takeaway

A big part of my earlier valuations of Woolworths shares relied on a stabilisation of profit margins within the supermarket business and retained ownership of the Home Improvement business. Neither of these two key items played out as I envisaged. Sure, Woolworths has an impressive supply chain and will benefit from rising prosperity and population growth, but with competition mounting, reinvigorating the Woolworths share price won’t be easy.

Forget Woolworths, I can't believe this...

The Motley Fool's expert analysts recently hand-picked their top technology stock idea for 2016 and it's easy to see why: It has a big dividend yield, is growing rapidly and has heaps of cash on its balance sheet. Best of all: their top stock pick of 2016 is yours free! Just click here, enter your email address, and we'll send you their research report. No credit card details or payment required.

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes -- and encourages -- your feedback on Google+, 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.