In a week when the share market was hit hard by global volatility, two shares stood tall: Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW).
While the ASX 200 index tumbled 3.9%, Coles shares rose an impressive 7.3% and Woolworths climbed 4.5%. That kind of outperformance is eye-catching, and it speaks to the defensive appeal of supermarket stocks during uncertain times.
So why the sudden surge in supermarket shares?
The answer lies in their resilience. Coles and Woolworths operate in the consumer staples sector, selling essential goods that Australians need regardless of what's happening in the economy. They are also largely immune to any real impacts from US trade tariffs given that their sales are generated locally.
When markets are in freefall, investors tend to rotate into lower-risk, income-generating businesses with stable cash flows—and few fit that bill better than the supermarket giants. It is a classic flight to safety—and it paid off handsomely for those holding supermarket shares.
Is it too late to buy Coles and Woolworths shares?
The good news is that it may not be too late to buy the shares of these two giants.
For example, UBS recently put a buy rating and $22.35 price target on Coles shares. This implies modest potential upside of approximately 6% for investors from current levels.
It also expects a dividend yield in the region of 3.6% over the next 12 months, which boosts the total potential return to almost 10%.
Bigger returns could be on offer from Woolworths shares according to analysts at Goldman Sachs.
The broker currently has a buy rating and $36.10 price target on Australia's largest retailer. This suggests that upside of 16% is possible for investors buying at current levels. And an expected dividend yield of 3.1% over the next 12 months lifts the total return of over 19%.
Commenting on its buy rating, Goldman highlights the reasons why its thinks Woolworths would be a good option for investors. It said:
Our Buy thesis is based on 1) robust supermarkets growth of ~4% in FY23-26E driven by strong population growth and a rational, oligopoly environment. 2) omni-channel leader further extending share gains due to its early mover advantage in digitalization and omni-channel execution. By 2030E, we expect WOW to be the dominant leader in online with ~50% share in a space that is expected to go from 5% to 10% of the total grocery market. 3) loyalty/retail media further margin opportunities: Woolworth's strong digital and omni-channel advantage is further reinforced through a virtuous cycle of loyalty and retail media (Cartology). WOW is also trading below fair value.
