Woolworths Limited (ASX: WOW) shares appear to have returned to a growth trajectory, with shares up 10% over the past three months.
In fact, since June 2016, the supermarket giant's share price has rallied from around $20.50 to over $25.
However, the Woolworths share price is still a long way from the lofty days of 2014, when it was riding as high as $37.
Should you own Woolworths Limited shares in 2017?
Woolworths' downfall has been well documented. The company's supermarket business started to gouge customers and pressure suppliers — giving it a wider profit margin — while Masters Home Improvement continued to cost shareholders hundreds of millions of dollars.
Sure enough its shares fell — hard.
Now, Masters is gone. The properties have been sold off and inventory has been liquidated.
And while the company's Big W business remains under pressure from competitors, Woolies has also cleared its decks of prior management.
This managerial change could be what it takes to steer the company in a promising direction.
However, whenever we are considering the merits of a turnaround story, such as Woolworths, it's important to remember the words of Warren Buffett, the world's greatest investor: "Turnarounds seldom turn."
Woolies is not necessarily coming back from the brink. It is merely trying to restore its status as the most competitive supermarket operator and secure its profit margins for shareholders.
However, that is not an easy thing to do. And right now traditional retailers are being pulled in many directions. For example, in three years, is it so hard to imagine more people doing online shopping through Coles – owned by Wesfarmers Ltd (ASX: WES) – than in store at Woolies?
My point is that what you are buying in the sharemarket today is a business's profits tomorrow. So if Woolies can't restore itself to its former glory, are we still overpaying for its shares today?
Personally, I think Coles and Aldi are better placed as we hurtle towards more online shopping and speedy delivery than Woolworths. Aldi doesn't have the supply networks of Coles or Woolies, but that's not what it is trying to do. It does quality products at cheap prices.
Woolies on the other hand is at the top of the food chain (pun intended). So in all respects it has more to lose.
Fall asleep at the wheel — as it has done recently — and it risks a lot more.
Foolish Takeaway
In my opinion, Woolworths is not doomed to fail. But I think investors must be wise to consider the risks that it may never get back to where it was and may lose its mantle as the number-one supermarket.
For investors the tradeoff here is that Coles (Wesfarmers) shares are expensive and Woolworths share appear cheaper using past numbers. I don't feel compelled to buy or sell either stock right now. That is, Woolworths is not a standout buy or a strong sell in my book. Confident shareholders could choose to sit tight in 2017.
Now, please excuse me while I order tonight's ingredients with Coles online.
