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Why Woolworths Limited shares could sink to new lows

Shares in Woolworths Limited (ASX: WOW) finished Wednesday’s trading session at $21.02 after declining 0.7%.

The fall in Woolworths’ share price comes as the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) ended another session in the red, recording a fall of 1.1%.

With Woolworths’ shares sinking to a 52-week low of $20.50 in mid-April, no doubt shareholders were hoping that the worst was now behind Australia’s largest retailer.

A view that the current share price already reflects the market’s acknowledgement of the profit margin squeeze caused by rising competition from Aldi and Coles, owned by Wesfarmers Ltd (ASX: WES) and the cost of extricating itself from the Masters’ debacle, should hopefully mean that risks to the downside are limited.

More falls ahead?

On the other hand, some investors believe that even at the current share price the market is not fully appreciating the extent of the margin decline which could come.

Buying opportunity?

Near term share price weakness won’t be a buying opportunity for investors with the view that the share price of Woolworths still has further to fall on fundamental grounds .

However, for investors who see value around current levels, a general market sell-off in stocks could present an attractive buying opportunity for long-term shareholders.

Consider this

The index is currently trading near 5,150 points. A decline back to its one-year low of 4,707 points would require a fall of approximately 9%. Should Woolworths fall by a similar amount to the market then that would imply a share price close to $19.

Based on data provided by Reuters, the average analyst forecast for Woolworths’ earnings per share in financial year 2017 is 134 cents.

Based on this forecast, if the share price should fall to $19, investors would have the opportunity to acquire stock on an implied price-to-earnings forecast of about 14 times.

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