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Why Coles can outperform Woolworths over the next month or two

The jump in the Coles Group Ltd (ASX: COL) share price today when its peers are slumping in the red might be an early sign of what lies ahead.

The Coles share price gained 1.8% to $16.28 in the last hour of trade while the Woolworths Group Ltd (ASX: WOW) share price fell 0.9% to $35.76.

Grocery distributor Metcash Limited (ASX: MTS) is also weaker. The stock eased 0.4% to $2.82 while the S&P/ASX 200 Index (Index:^AXJO) recovered from early losses and gained 0.7% at the time of writing.

Set to run higher in the short-term

The outperformance of Coles may have something to do with a note from Morgan Stanley. The broker believes there is a 60% to 70% chance that shares in the supermarket chain will rise over the next 60 days.

This is in large part to what the broker believes is Coles more attractive valuation to its rival Woolies.

“We believe COL has the most defensive earnings base across our coverage universe and its lower P/E [price-earnings], higher payout ratio relative to WOW is likely to be increasingly attractive in a yield scarce world,” said the broker.

Morgan Stanley is recommending Coles as “overweight” (which means “buy”) with a price target of $17.75 a share.

More defensive business

Coles more defensive business is something many investors overlook. Woolworths may have the better run supermarket, but it’s encumbered by its underperforming Big W discount supermarket chain.

Woolworths also owns a big stake in a hospitality business that includes pubs and hotels. This is one of the hardest hit sectors from the COVID-19 pandemic.

On the other hand, Coles is a much simpler business after it was spun out of retail conglomerate Wesfarmers Ltd (ASX: WES). It isn’t dragged down by the poorly performing Target department store business or worry about how the coronavirus is impacting on discretionary retail.

Other ASX shares that can outperform

But Coles isn’t the only defensive business that’s trading on attractive valuations in this bear market.

Shipbuilder Austal Limited (ASX: ASB) is another that I think is well placed to sail ahead of the broader market. Most of its business comes from building combat vessels for the US navy.

These contracts aren’t impacted by the looming recession and the US government won’t be cutting back on defence spending. If anything, governments around the world will likely increase their defence budgets to counter the rise of China.

Another that is well placed in this uncertain climate is the Ansell Limited (ASX: ANN) share price. Demand for its medical gloves and protective equipment will probably stay stronger for longer, even after the coronavirus-curve peaks.

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Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Austal Limited. The Motley Fool Australia has recommended Ansell Ltd. 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.