Woolworths Limited sinks – Should you sell and move on?

Credit: Alon

What: The share price of Woolworths Limited (ASX: WOW) fell 2.6% on Tuesday to close at $21.87.

While the stock managed to hold its head above the recent 52-week low of $20.50, Tuesday’s price action suggests shareholders could soon see a re-testing of the lows.

Worryingly, investors appeared quite savage in their selling of Woolworths shares with the stock underperforming the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) decline of 1.6%.

So What: With the stock down 26% in the past year, it would seem reasonable to assume that the majority of the decline in Woolworths’ share price has now occurred.

While that may prove to be the case, it shouldn’t be considered a forgone conclusion.

Given Woolworths appears to be in an earnings downgrade cycle, there is arguably more potential for surprises on the downside than on the upside. In fact, given the likely costs associated with extracting the group from its disastrously expensive foray into the home improvement sector there is a high chance that analysts have under-budgeted the related “one-offs”.

Now What: With both earnings and dividends under pressure coupled with a toughening industry environment, the outlook for Woolworths is far from rosy.

While it is foreseeable that at some point in the future Woolworths’ risk-reward trade off will suggest a favourable investment opportunity, arguably that time has not arrived yet.

Given the current headwinds facing the group, active investors might consider the upside potential of blue chip rival Wesfarmers Ltd (ASX: WES) a better bet at present.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. 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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