Is it time to dump Woolworths Group Ltd (ASX:WOW) for Wesfarmers Ltd (ASX:WES) ahead of the profit results?

The underperforming Coles supermarket chain owned by Wesfarmers Ltd (ASX: WES) may have turned a corner just as growth in Woolworths Group Ltd (ASX: WOW) is peaking, according to UBS.

This could be a signal for investors to rotate out of Woolworths for Wesfarmers ahead of the August reporting season.

The stocks have been outperforming the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index since the start of the year with a gain of 10% each but Wesfarmers may pull ahead in the coming months if the findings from UBS’s bi-annual supermarket survey are anything to go by.

The broker had interviewed 41 suppliers and found that Woolies has lost ground on half of the 26 operational metrics (such as on-shelf availability, effectiveness of promotions and pricing) measured by the survey, according to the Australian Financial Review.

This breaks the trend for Woolies which had recorded improvements for three consecutive periods, while Coles overall score has stabilised after three consecutive years of declines.

A separate survey on 1,100 shoppers by UBS pointed to a similar outcome and the broker admits that Coles is performing better than it had anticipated, so much so that UBS is now forecasting Coles’ same-store sales will start recovering in the September 2019 quarter – three months earlier than originally anticipated.

The broker’s supplier survey has a high 72% correlation to Coles and Woolies same store sales growth and is seen by experts as a good leading indicator of future performance of the supermarkets.

The good news couldn’t come at a better time for Wesfarmers as it is looking to spin-off Coles into a separate listed company before the end of this calendar year.

Investors are expecting further updates when Wesfarmers posts its full year results next month, and any hint to confirm that Coles is at an inflection point after a long period of playing second fiddle to Woolies will be warmly received by shareholders who will get shares in the new Coles stock in proportion to the shares they own in Wesfarmers.

Any positive news about Coles gaining lost ground will also likely spur buying in Wesfarmers shares as investors may be tempted to get a jump on the new listing.

We could see shares in Woolies struggle to keep up given that lack of catalysts, particularly if its August results provide hints that growth is peaking, just as UBS is predicting.

August will be an interesting time for shareholders in both companies, although it’s those hanging on to Metcash Limited (ASX: MTS) that will be most anxious following the grocery supplier’s painful profit warning in May.

Thankfully for Metcash’s management, it won’t have to front investors with results until early December when it hands in its half year results.

There are other stocks that are well placed to outperform this year too. The experts at the Motley Fool are particularly bullish on a niche group of stocks which are riding a global boom.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended 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 Scott Phillips.

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