When an Australian blue-chip share reaches a level not seen in years, it's normally enough to make ASX investors on the hunt for cheap ASX stocks sit up and pay attention.
For one, they might actually already own this share and be wondering why things aren't going so well (particularly amid the current ASX bull market).
For another, investors who don't already own shares of this stock might be wondering whether they are staring a potential bargain buy in the face.
Woolworths Group Ltd (ASX: WOW) is arguably one such cheap ASX stock.
This consumer staples share has had one of its roughest years in recent memory over 2024 to date. Woolworths shares have spent 2024 in a state of freefall.
Back at the start of 2024, Woolworths was trading at just over $37.50 a share. But today, those same shares are trading for just $30.18 each, representing a rather horrid 19.5% drop over this year so far. Woolworths shares are now at their cheapest levels since COVID-ravaged 2020.
That contrasts starkly with the broader S&P/ASX 200 Index (ASX: XJO), which has jumped more than 10.6% over 2024 and hit several new all-time highs in the process.
Check out this disparity below:
Not a great look.
So, how did Woolworths get here?
Image source: Getty Images
Woolworths' not so merry 2024
Well, it seems to be a combination of factors. Investor confidence in this now cheap-looking ASX stock first began to waiver when Woolies released its half-year earnings report back in February.
These earnings were not well-received, with the company seemingly losing market share to Coles over the first half of its 2024 financial year. However, at the same time these challenging earnings were released, Woolworths CEO Bradford Banducci simultaneously (and suddenly) announced his resignation.
Subsequent quarterly updates, as well as Woolworths' August full-year earnings report, seemed to confirm the trend of Coles snapping up Woolies' market share.
Not much else has seemed to go right for Woolies this year. The company has also faced allegations of anti-competitive behaviour and potential industrial action in the leadup to the crucial Christmas period.
Is this a cheap ASX stock?
So, with Woolworths' steep share price decline in 2024, many investors might wonder whether it is now a cheap ASX stock.
Well, it looks like it is. Woolworths' 2024 full-year report was a bit of an accounting mess, thanks to some significant writedowns. As such, the company officially trades on a rather misleading price-to-earnings (P/E) ratio of 343.8 right now.
Using the company's more sensible 'group basic earnings per share before significant items' metric of $1.40 per share, which can be thought of as effective earnings per share (EPS), we get a current P/E ratio for Woolworths of 21.6. That's actually below Coles Group Ltd (ASX: COL)'s present earnings multiple of 22.
Now, it's almost unheard of for Woolworths to be a cheaper ASX share than Coles on a P/E basis. To my knowledge, it hasn't happened in the six years that Coles has been an ASX share in its own right.
This is why Coles and Woolworths are trading on nearly identical dividend yields right now. At the time of writing, Coles shares offer a yield of 3.67%, with Woolies at 3.43%. Again, this is highly unusual by normal ASX standards.
So Woolworths is incontrovertibly a cheap ASX stock today, at least judging by its historical pattern.
Does a cheap stock mean a buying opportunity for Woolworths?
But a cheap ASX share doesn't automatically translate into a buying opportunity.
If Woolworths continues to lose market share to Coles, its value as a business will probably continue to decline. For Woolworths to be a buying opportunity today, in addition to just being a cheap ASX stock, it will need to right the ship and start regaining its former mojo.
One ASX expert who thinks that might indeed be the case is investment bank Goldman Sachs. As we covered earlier this week, Goldman's analysts "believe that WOW's structural advantages of its store network, scaled online position and leading data/analytics capabilities will enable market share wins in the medium term". As a result, this broker has given Woolworths shares a 12-month price target of $36.20.
Let's see if Goldman is on the money here. Only time will tell.
