3 reasons this broker thinks Woolworths shares are a cheap buy

Is this supermarket giant being undervalued by the market?

| More on:
A businessman looking at his digital tablet or strategy planning in hotel conference lobby. He is happy at achieving financial goals.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Woolworths Group Ltd (ASX: WOW) shares have been having a tough time over the last 12 months.

During this time, the supermarket giant's shares have lost about 18% of their value.

This means that a $10,000 investment in Woolworths would now be worth approximately $8,200.

Whereas over the same period, the ASX 200 index has risen by almost 8%. This would have turned a $10,000 investment into $10,800.

That's a disappointing opportunity cost of $2,600 from investing in Woolworths shares.

But could the worst be over? Is now the time for investors to snap up the retailer's shares while they are cheap?

Well, Goldman Sachs certainly thinks it is. The broker sees significant value in its shares at the current level and has named a few reasons why it thinks investors should be investing today.

3 reasons Woolworths shares could be cheap

One of the reasons that Goldman Sachs believes investors should be buying the company's shares is its customer loyalty.

It notes that Woolworths has some of the highest consumer stickiness and loyalty among its peers. The broker expects this to drive market share gains.

Another reason it is positive is the company's ability to pass on cost inflation. It believes this will protect Woolworths' margins more than the market currently anticipates.

Finally, the broker highlights that Woolworths shares are trading well below historical averages. Given its positive sales growth outlook, it feels this is unwarranted and has created a compelling buying opportunity. Goldman summarises:

WOW is the largest supermarket chain in Australia with an additional presence in NZ, as well as selling general merchandise retail via Big W. We are Buy rated on the stock as we believe the business has among the highest consumer stickiness and loyalty among peers, and hence has strong ability to drive market share gains via its omni-channel advantage, as well as its ability to pass through any cost inflation to protect its margins, beyond market expectations. The stock is trading below its historical average (since 2018), and we see this as a value entry level for a high-quality and defensive stock.

The broker currently has a conviction buy rating and a $39.40 price target on its shares. Based on its current share price of $31.54, this implies a potential upside of 25% for investors over the next 12 months.

In addition, the broker is forecasting 3.4%+ dividend yields from Woolworths shares through to at least FY 2026.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Retail Shares

A woman and two children leap up and over a sofa.
Retail Shares

3 ASX retail shares that could benefit from potential interest rate cuts

Would you buy more shoes, sports gear, or furniture if interest rates fall?

Read more »

Modern accountant woman in a light business suit in modern green office with documents and laptop.
Retail Shares

Why this top fund manager has been snapping up Lovisa shares

This leading fund manager believes the sell-off in Lovisa shares was an overreaction.

Read more »

Puk Pukster the Pug is displaying her new piece of jewellery with a sad face.
Share Fallers

This ASX 200 superstar is down 13% in 2 days. Time to pounce?

ASX 200 investors have sent this market darling spiralling lower. Is it a bargain or a falling knife?

Read more »

Two couples race each other in supermarket trollies, having a great time, smiling and laughing.
Retail Shares

Would I be crazy to buy Coles shares at $16?

The Coles share price has outperformed rival Woolworths over the past year.

Read more »

A woman sits on sofa pondering a question.
Retail Shares

ASX retail shares mixed amid modest April sales growth

What does the latest sales data mean for ASX retail shares?

Read more »

Man on a laptop thinking.
Broker Notes

Why did Goldman Sachs just downgrade Wesfarmers shares?

The ASX 200 conglomerate has had a ripper run of share price growth. So why is Goldman Sachs downgrading it?

Read more »

Woman checking out new iPads.
Retail Shares

Dump 'em! Top broker says sell these 3 ASX retail shares

This comes amid high interest rates, weak retail sales, and persistently negative consumer sentiment.

Read more »

A woman looks at a tablet device while in the aisles of a hardware style store amid stacked boxes on shelves representing Bunnings and the Wesfarmers share price
Retail Shares

What is the price target for Wesfarmers shares?

Is there further success coming for this retail giant?

Read more »