Coles Group Ltd (ASX: COL) shares are sliding today.
Shares in the S&P/ASX 200 Index (ASX: XJO) supermarket giant closed yesterday trading for $22.09. In early afternoon trade on Wednesday, shares are changing hands for $21.86, down 1.0%.
For some context, the ASX 200 is up 0.8% at this same time.
Today's underperformance is far from the norm for Coles shares over the past 12 months. Despite today's dip, shares remain up an impressive 31.9% since this time last year. That's more than three times the 10.3% one-year gains posted by the ASX 200.
And this doesn't even include the 69 cents a share in fully franked dividends Coles has paid to eligible investors over the year. At the current share price, this sees Coles stock trading on a fully franked trailing dividend yield of 3.2%.
With this kind of strong run behind it, is the Aussie supermarket giant a buy, hold, or sell?
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Should I buy Coles shares right now?
Starting with the bearish case, Baker Young's Toby Grimm has a sell recommendation on Coles shares, citing concerns over the company's rapid share price gains (courtesy of the Bull).
"The supermarket operator has performed admirably in the past 12 months," Grimm said.
"Its performance and defensive qualities may support the stock through to the end of the financial year, but it now trades at a premium of more than 30% to our valuation," he added.
Grimm also pointed to concerns about heightened competition from Woolworths Group Ltd (ASX: WOW).
"We note that re-invigorated rival Woolworths recently signalled its intention to increase competitive pressure."
Bell Potter Securities' Christopher Watt is more optimistic about Coles stock, in part for its reliable passive income payouts. But he's not recommending buying the ASX 200 stock just yet (from the Bull).
"The retail giant remains a defensive core holding, underpinned by recurring supermarket earnings, which make up about 90% of group earnings before interest and tax," said Watt, who has a hold recommendation on Coles shares.
According to Watt:
The balance sheet is conservative, and strong free cash flow supports its recent fully franked dividend yield of about 3.3%. Margin improvement relies on technology rollouts and cost-out initiatives, but near-term upside appears priced in.
Watt concluded, "Keep as a stable yield anchor, but we wouldn't recommend adding stock to portfolios at these levels."
The buy case for the ASX 200 supermarket stock
In early May, following the release of Coles' third-quarter update, Macquarie Group Ltd (ASX: MQG) maintained its buy rating for Coles shares.
The broker noted:
Defensive growth characteristics of Coles remain intact following the update. We remain positive with shareholder returns being driven by earnings momentum, and P/E [price to earnings] broadly in line with long-run average.
Macquarie has a 12-month price target of $23.10 per share for Coles stock. That represents a potential upside of 5.7% from current levels.
