Is the Woolworths Limited share price at bargain levels?

Credit: James Arboghast

The Woolworths Limited (ASX: WOW) share price has risen 20% in 12 months, but it may not be a bargain at today’s prices.

What analysts are saying about Woolworths shares

According to The Wall Street Journal, of the 16 analysts covering Woolworths’ shares, four rates it as a buy, five have a ‘hold’ rating and seven analysts are negative. But despite the negative analyst consensus, Woolworths’ shares are worth $26.84 according to their models, which compares favourably to the current price of $25.78.

Are Woolworths shares a ‘bargain’?

As any seasoned investor will tell you, analyst price targets are not always proven right. Far from it, in fact.

However, many professional investors agree that in order for an investment to be considered a ‘bargain’, its price should be at least 30% less than its value. Some die-hard value investors may demand an even wider ‘margin of safety’ than 30%.

Therefore, at their current price of $25.78, Woolworths’ shares do not appear to be a bargain using the analyst price targets.

A variant perception

Analyst price targets can provide a valuable insight into what the average investor is thinking (after all, it is a ‘consensus’ valuation).However, to do better than average an investor must be contrarian.

As Seth Klarman of The Baupost Group believes, value investing is a marriage between contrarian thought and a calculator.

To be successful at value investing, you must be able to understand why the majority of analysts are wrong and find a way to exploit your variant perception. For example, are analysts underestimating Woolworths’ long-term potential? If they are, buying shares today might be a good idea!

Foolish Takeaway

Analyst price targets are no substitute for your own research. Nonetheless, I think Woolworths’ shares are not a bargain at today’s prices. Moreover, I think the competitive pressures of Aldi and Coles will limit its growth potential. 

I believe the best place to find ‘bargains’ is further down the market, where some of the fastest growing Australian companies can be found.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes and encourages your feedback. You can follow him on Twitter @OwenRask.

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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