The Woolworths Limited (ASX: WOW) share price has bounced back over the past six months.
However, shares of the supermarket giant are still well down from their five-year highs of around $37.70.
Time to buy?
Ordinarily, a falling share price is good news for long-term investors because it offers a chance to buy a business at a discounted price. But buying at a discounted share price only works well if you believe it will bounce back!
To garner an insight into the future of a company's share price we need to undertake qualitative research and weigh up the good and the bad reasons for holding on.
Here are three reasons why it may be time to sell your Woolworths shares
- Woolworths is in a turnaround. At the highest level, Woolworths is clearly in a turnaround phase. Turning around a $30 billion business is never easy but less so when you sell products into a competitive consumer market. Woolworths' previous management team chose to gouge consumers and suppliers to widen its profit margins. However, what's obvious now is that Coles, owned by Wesfarmers Ltd (ASX: WES), is gaining ground and has less to lose.
- Competition. While Woolworths is trying to turn its key supermarket and liquor businesses around, it faces competition from the likes of Coles and Aldi. Moreover, Big W, Woolworths' general merchandising business, is struggling to survive with Kmart and Target moving ahead.
- Online threat. We often talk about the arrival of Amazon in Australia. While that threat may not become material for a number of years, Coles appears better placed to deal with the threat of online competition, in my opinion.
Foolish Takeaway
Given the threats to its business, some of the reasons to be positive about owning Woolworths shares would include its sophisticated supply chain and share price valuation. However, even at today's seemingly discounted valuation, the average fair value of all sell-side analysts surveyed by The Wall Street Journal is $23.78 – only 2% higher than Woolworths' current price.
In summary, Woolworths' share price could bounce back from here — but I would not be willing to bet on it.
