One of the dangers present for all investors is becoming overly attached to a stock. In other words, it is held in a portfolio because of an attachment to its products, previous success regarding investment returns, or else for some other reason that makes an investor fond of the business in some way, shape or form.
And, while it is natural to feel more familiar with some stocks than others (and more confident with specific stocks), it can be bad news for an investor's bottom line if a portfolio is emotional as opposed to efficient.
That's because, while a stock may have performed well in the past or has enjoyed success as a business in years gone by, it may not continue to do so in the future. Therefore, it helps to take a fresh look at all holdings at regular intervals so as to determine whether the stocks in a portfolio represent the best possible risk/reward opportunities and are the most appealing places to invest.
Of course, two stocks that have enjoyed success in the past but which are struggling at the present time are Coca-Cola Amatil (ASX: CCL) and Woolworths (ASX: WOW). They are both enduring challenges in the form of increasing competition and are struggling to deliver profit growth.
For example, Coca-Cola Amatil has seen its bottom line fall by 4% per annum during the last five years, with its share price falling by 19% during that time period. And, while Woolworths has been able to grow its earnings by 5.5% per annum during the same period, it is currently in the midst of a major price war that is showing little sign of abating.
However, Woolworths will have a new strategy under its new CEO and this could boost sentiment in the short run, as well as improve profitability over the medium to long term. For example, Woolworths may refresh its pricing strategy, rationalise its struggling home improvements business and seek to slim down and concentrate its operations so as to make itself leaner, more efficient and more focused on delivering value for its customers and its shareholders.
Meanwhile, Coca-Cola Amatil has the benefit of a US$500m war chest through which to stage a marketing comeback, with more choice available to consumers through a refreshed product line-up. Furthermore, Coca-Cola Amatil is investing in fast-growing economies across Asia where there is scope to not only increase market share, but to also benefit from improving wealth and rising consumption of soft drinks, too.
Looking ahead, Coca-Cola Amatil is expected to return to growth this year with a rise in earnings of 5.4% and, while Woolworths is forecast to see a decline in its earnings of 3.5% per annum during the same time period, its price to sales (P/S) ratio of 0.59 is considerably below the market's P/S ratio of 1.48. And, with both stocks offering ASX-beating yields of 4.8% (Woolworths) and 4.6% (Coca-Cola Amatil), they appear to be great value, offer top notch incomes, and possess considerable turnaround potential.
