Down 7%: Is the Metcash Limited share price now in the buy zone?

Unfortunately for its shareholders, the Metcash Limited (ASX: MTS) share price has had a terrible start to the week.

In afternoon trade the wholesale distributor’s shares are down 7% to $2.01.

What happened?

With no news out of the company and no notable broker research notes related to it, today’s decline is likely to be a case of profit taking following a sudden and sharp rise in its share price last week.

From its low on Monday of last week to the close on Friday, Metcash’s shares increased by over 9%.

But unfortunately today’s decline means that these gains have almost been given back in full now.

Is this a buying opportunity?

Metcash’s shares are currently changing hands at a little over 10x trailing earnings. This is undoubtedly cheap even for Metcash which traditionally trades at a lower than average earnings multiple.

But unfortunately I think this low multiple may well be justified. I’m not overly bullish on the company’s future considering the rise of ALDI and the price-war between Wesfarmers Ltd (ASX: WES) and Woolworths Limited (ASX: WOW).

I believe these challenges mean there is a real danger that Metcash could continue to see earnings fall for the foreseeable future.

It appears as though I’m not alone in this view either. The most recent data from ASIC shows that 10% of its shares are in the hands of short sellers at present.

Overall, I see many reasons to avoid its shares and very few to buy them at this point despite how cheap they appear.

Finally, Metcash used to be a great dividend share until hard times meant that management suspended it. So if you're looking for a great yield then look no further than this huge one.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia owns shares of Wesfarmers Limited. 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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