The share price of our largest supermarket chain is falling this morning and could continue to underperform over the next few weeks, if a prediction by Morgan Stanley comes to pass.
The Woolworths Group Ltd (ASX: WOW) share price tumbled 1.7% to $32.15 even as the Coles Group Ltd (ASX: COL) share price gained 0.4% to $12.48 and the S&P/ASX 200 (INDEXASX: XJO) index traded at breakeven at the time of writing.
What's to blame for the broker's bleak prediction?
Morgan Stanley thinks there's a more than 80% chance that the Woolworths share price will fall relative to the market over the next 30 days. This is because of the completed $1.7 billion, off-market share repurchase program that had been undertaken by the company.
Demand for the buyback had been strong and resulted in an 84.7% scale back, and a maximum discount of 14% was applied to the final offer price for the shares. This means shareholders who tendered their shares would only have gotten a small percentage of their shares accepted at $28.94 a share (unless they fell under the priority allocation).
The tender opened on April 16 and only closed last Friday. This means investors wanting to sell their stock through the buyback program would not be able to sell on-market until the process is completed. These shareholders would only get their unsuccessful tendered shares released back to them by tomorrow. Given the large scale back, there could be a lot of stock that could be dumped on-market then.
"WOW's previous A$704m off market buyback in 2010 was scaled back 88.2%. We think a 'sellers strike' as a result of the buyback has contributed to WOW's outperformance during the tender period (+7.9% vs. ASX200 +3.8%) by reducing the number of sellers in the market," said Morgan Stanley.
"For the 2010 off-market buyback, WOW outperformed in the buyback period +2.8% and in the 30 days post underperformed the ASX200 by -4%."
Morgan Stanley has an "underweight" recommendation on Woolworths with a price target of $28 per share.
Foolish takeaway
Some do not like Woolworths as it's trading on a FY20 consensus price-to-earnings (P/E) ratio of 23x. That's right at the top-end of the stock's P/E range over the past five years and it's significantly above the market's average P/E of around 16x.
I think Woolworths is a well-run company and holds a strong position in the defensive supermarket industry. Its struggling Big W department store is also showing encouraging signs of a turnaround.
While the stock could underperform in the shorter-term, investors with a long investment horizon shouldn't be too worried about the potential dip.
And, if you're looking for stock to invest in today, take a closer look at these 5 dirt cheap shares…
