Recently, we aired a special video report briefly summarising the process of building a wealth-generating share portfolio.
We suggested investors build their portfolio using a bottom-up approach, with solid 'cash-generating' companies making up the foundations.
While the pyramid approach to portfolio allocation certainly has its limitations, we suggested an investor could expect these blue chip shareholdings to make up anywhere between 40% and 60% of the overall portfolio.
Woolworths Limited (ASX: WOW), Wesfarmers Ltd (ASX: WES) and Telstra Corporation Ltd (ASX: TLS) are examples of such companies.
But are they a buy at today's prices?
Let's take a quick look at each and see which – if any – are right for your portfolio.
Woolworths
Previously, I said Woolworths shares are worth around $28. My assumption took into account the intense competition it faces in the supermarket sector as well as its struggling Masters Home Improvement business.
In addition to the above, Woolworths' shares have been heavily discounted as a result of its lack of strategic and managerial certainty, following the proposed resignation of CEO Grant O'Brien. Currently trading at $24.50, Woolworths' shares appear cheap. However, investors would be wise to consider the risks before buying in.
Wesfarmers
Wesfarmers is in much the same boat as Woolworths in so far as fears of an all-out price war have wreaked havoc on the company's share price. However, there a few noticeable differences between Woolworths and Wesfarmers. Firstly, Bunnings Warehouse and Officeworks are market-leading businesses that account for a much larger proportion of Wesfarmers' sales than Woolworths' Masters, and Home Timber and Hardware businesses.
Secondly, Wesfarmers' Coles is growing its profit margins at a time when profits from Woolworths' supermarkets are going in the opposite direction. While Wesfarmers' Target business is struggling, its Kmart chain is showing signs of modest growth.
Telstra
Telstra is the quintessential blue chip stock for the base level of a well-diversified portfolio. As Australia's leading telecommunications company, Telstra has wide profit margins, recurring revenues and a big dividend.
Despite the 8% fall in the company's share price over the past three months, Telstra is yet to move into a compelling valuation range for new buyers, in my opinion.
Buy, Hold or Sell?
I think each of these three companies deserve a spot on Australian investors' watchlists, but Woolworths is the only one I'd consider building a position in at today's prices.
However, until it affords investors some clarity over its CEO appointment and sheds more light on the fall in profit margins, I'd rate it as a 'hold'.
