Could Woolworths Limited shares be the 'Comeback King' of 2016?

Woolworths Limited (ASX:WOW) could surprise the market with a turnaround in its fortunes.

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ASX investors are well aware of the battering that Woolworths Limited (ASX: WOW) shareholders have taken over the past year.

In the last 12 months the stock price has fallen by around 20%. With the share price currently hovering around the $22 level, the stock is just $1.50 above its lows of not just the last year, but also of the past decade!

Worries aplenty

ASX investors are also well aware of the problems facing Woolworths.

These problems range from stemming the loses and formulating an exit strategy from the failed Masters Hardware venture to dealing with the increased competitive threats from Aldi, Costco and Coles, owned by Wesfarmers Ltd (ASX: WES).

As I noted in this article recently, perhaps the biggest concern when it comes to determining the group's long-term value is what the future holds for the group's world-leading profit margin.

The market would appear to have a reasonably clear understanding of the headwinds facing Woolworths and these are indeed real and concerning. Most importantly of all, these headwinds do reduce the intrinsic value which most investors will ascribe to the stock.

Surprises on the upside?

While the challenges appear to be clearly understood, there remains a possibility that all the bad news is well-and-truly priced in to the current share price and indeed undue pessimism may now be reflected.

In situations such as these, if the future doesn't turn out to be as bad as the market expects, unloved stocks such as Woolworths can race higher when investors adjust their expectations towards a less dire outcome.

Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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