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Coles and Wesfarmers share prices reach for new highs. Should you invest?

The share prices of 2 prominent members of the S&P/ASX 200 Index (ASX: XJO) have topped, or come close to, fresh highs in today’s trading.

Shares in Coles Group Ltd (ASX: COL) rose by 1.98% to reach an all-time high of $18.54 before falling back to $18.46 at the close. Meanwhile, Wesfarmers Ltd (ASX: WES) surged as high as $47.31, just shy of its high, before falling back to $47.12 at the close. It’s also worth noting that Wesfarmers is still a shareholder in Coles Group, holding approximately 4.9% of total shares in the company.

Despite no announcement coming from either company to spark this morning’s upward price movement, both have been strong performers throughout 2020.

So, can the Coles and Wesfarmers share prices continue to outperform moving forward, or is this likely the peak?

Why both are pushing higher

Coles has undoubtedly benefitted from the panic-buying of groceries facilitated by COVID-19 lockdowns. According to the company’s latest trading update in April, the supermarket juggernaut improved its overall third-quarter sales by 12.9% to $9.2 billion.

This overall revenue figure included a 13% improvement in its supermarkets business, which had its 50th consecutive quarter of sales growth.

While the market is waiting in anticipation for Coles to report its full-year earnings next month on 18 August, today’s record share price is an indication that the company will showcase further revenue improvements in Q4. General second-wave fears and further lockdowns for Victoria over the past month will likely translate to further over-consumption at the checkout, and these macro trends are pushing the Coles share price higher.

Wesfarmers has similarly seen sales rocket from its brands Bunnings Warehouse, Kmart, Target, and Officeworks, as consumers have opted to make home improvements and update their working from home setups.

In a June trading update, Wesfarmers revealed second-half FY20 sales growth of 19.2% for Bunnings, 27.8% for Officeworks, and 68.7% for Catch.com.au. This saw the group’s retail businesses deliver total online sales growth of 89% in the first half of the 2020 calendar year.

Wesfarmers will report full-year earnings on 20 August, but its red-hot share price arguably suggests the market is confident of further improvements in revenues for Q4 FY20.

Should you invest?

The price-to-earnings (P/E) ratio is a much-loved metric for ascertaining the overall expensiveness of a particular share and one of the first things I look at when researching a company.

Coles is currently situated on a P/E ratio of 20.77. This is neck and neck with competitor, Woolworths Group Ltd (ASX: WOW), which currently trades on a P/E of 19.57. It is, however, much lower than Wesfarmers’ P/E of 24.44. On this basis alone, Coles may be less expensive than Wesfarmers and therefore a better current buy for investors.

However, I really like the diversity of businesses that Wesfarmers holds, particularly Bunnings, Officeworks and Catch. I think Officeworks will perform particularly well in Q4 due to many of its items being tax-deductible, and plenty of companies recently informing their employees that they will be working from home for the remainder of 2020. Its Catch eCommerce platform has also been a key beneficiary of COVID-19, offering discounted goods in a similar vein to Kogan.com Ltd (ASX: KGN). And Bunnings is a timeless household Aussie name that almost always performs.

The Wesfarmers dividend yield of 3.25% also edges out Coles’ yield of 2.28%, so if I had to pick one of these 2 blue-chip companies, I’m going with Wesfarmers. I like its diversity of businesses and, after all, it is still a shareholder in Coles, so I get the best of both worlds!

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Toby Thomas has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd. The Motley Fool Australia owns shares of COLESGROUP DEF SET, Wesfarmers Limited, and Woolworths Limited. The Motley Fool Australia has recommended Kogan.com 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.

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