The past year has been a difficult time to be an investor in ASX-listed stocks with the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) declining 7.8%.
Given the downtrend, it is of course not surprising that even blue chip stocks have fallen.
Not all blue chips are equal however!
Clever investors who have owned shares in Ramsay Health Care Limited (ASX: RHC) are up 17% in the last 12 months – that's a significant outperformance.
Meanwhile, investors who have held Wesfarmers Ltd (ASX: WES) shares are down nearly 12% which is worse than the index but not that much worse.
In contrast, investors who have owned Woolworths Limited (ASX: WOW) over the past year have taken a beating, having experienced a 30% slide in the share price.
That kind of relative underperformance amongst defensive blue-chips could often, rightly, be a beacon for value investor however in this instance Wesfarmers may actually be the better buy.
Here's why
- Firstly, Wesfarmers cleverly got itself cashed-up prior to the recent slump in economic activity. This means the company is well positioned to seize opportunities for growth.
- Secondly, Wesfarmers operates as a conglomerate which means it has many more levers at its disposal to pull. Importantly, it also has an impressive long-term track record of successfully running businesses across a range of industries.
- Thirdly, the Coles business (which is owned by Wesfarmers) continues to improve its market position thanks in largely to its lower starting point when Wesfarmers acquired it. In contrast. Woolworths has been the biggest and the best in terms of its leadership within the domestic supermarket sector and this position is now facing significant challenges which will take some time to play out.
Based on forecast earnings per share data from Morningstar Research, currently investors could buy either Woolworths or Wesfarmers on a fully franked dividend yield of 5.5%. However when it comes to the price-to-earnings (PE) multiple that they are paying, Woolworths is trading on around 15 times, while Wesfarmers is around 16 times.
Given what would appear to be the superior growth options for Wesfarmers, the small premium in terms of PE multiple would appear to be justified. Investors should be cautious not to simply see a slump in share price as a buying opportunity but rather to use it as an opportunity to assess its relationship to value.
