Looking to buy Woolworths shares as an inflation hedge? Read this first

This expert reckons the supermarket giant is not an inflation-beating share…

| More on:
A young woman sits at her desk in deep contemplation with her hand to her chin while seriously considering information she is reading on her laptop.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • Inflation has been top of mind for ASX investors in 2022
  • Some investors are chasing Woolworths shares as a hedge against rising prices
  • But one ASX expert reckons supermarkets are best avoided

It's no secret that inflation has been one of, if not the, biggest concern for ASX investors in 2022. Rising prices have dominated headlines all through this year. Not to mention rising interest rates.

Inflation was once famously described by the legendary investor Warren Buffett as a "gigantic corporate tapeworm", taking its pound of flesh from all companies in the economy.

In our brave new world of high inflation, conventional wisdom has led investors towards consumer staples shares, such as Woolworths Group Ltd (ASX: WOW), as an inflation hedge. The theory goes that companies like Woolies sell us life essentials. Even though prices are rising, we all need to eat, drink, and keep our houses running.

As such, we'll all keep shopping at Woolworths and other consumer staples businesses, and pay the rising costs of those essentials. That's how the theory goes anyway.

We've seen more than a few brokers and ASX experts double down on this logic in recent times too. Earlier this month, my Fool colleague looked at broker Citi's buy rating on Woolworths shares.

This broker reckons Woolies can climb to $39.50 a share over the next 12 months, thanks in large part to "a return to predictable spending patterns".

But another ASX expert reckons this optimism is misplaced.

Is Woolworths an overrated share when it comes to inflation?

Blake Henricks of Firetrail Investments recently spoke to Livewire about inflation and sectors he's avoiding because of it. Interestingly, Henricks named supermarkets which, of course, is dominated by Woolies.

Here's some of what he had to say on why this sector doesn't quite shape up as an inflation beater:

Supermarkets is a great defensive sector to invest in that benefits from inflation. And if you run a simple model you say, 'Well, as inflation comes through, the basket goes up. If you hold gross margin percentages flat, gross profit dollars grow and therefore this great earnings growth happens with inflation.'

But the reality is margins are determined by competition and competitive dynamics. And that competitive framework isn't really changing at the moment. It's very stable, it's very good, but our view is that supermarkets aren't going to be huge winners from inflation. To date, that's been proven to be true because they've struggled to pass through some of those costs and we haven't seen big earnings upgrades.

And the multiples are fairly extended because people are gravitating towards those defensive sectors. So if there's one I'd call out, it'd be supermarkets as a controversial loser from inflation.

So there you go, Woolworth is not the inflation slayer that some might initially assume, at least according to this ASX expert.

Only time will tell which ASX experts have made the right call here.

In the meantime, the current Woolworths share price of $35.12 (at the time of writing) gives this ASX 200 consumer sales share a market capitalisation of $42.56 billion, and a dividend yield of 2.62%.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Consumer Staples & Discretionary Shares

Stock market crash concept of young man screaming at laptop on the sofa.
Share Fallers

Guess which ASX 200 stock just crashed 31% on slumping sales

The $1.3 billion ASX 200 stock is getting hammered today.

Read more »

Photo of a happy couple with their new car and car keys.
Consumer Staples & Discretionary Shares

Up 55% this year, why Macquarie believes Eagers Automotive shares can charge higher

Eagers set to capitalise as BYD’s Australian sales surge.

Read more »

Two race cars on a track at sunset.
Consumer Staples & Discretionary Shares

Down 36% in a year, this ASX 300 stock is one to watch

After a major sell-off, this high-performance cooling specialist might be gearing up for a turnaround.

Read more »

Two laughing young women hold shopping bags and ride an escalator up to another level in a Scentre Group shopping centre.
Broker Notes

3 ASX consumer sector shares to buy in July: expert

A leading expert has named its top 3 picks.

Read more »

person with large headphones looking puzzled holding their hand to their chin.
Broker Notes

Does Macquarie prefer Harvey Norman or JB Hi-Fi shares?

Both companies have market-beating long-term track records.

Read more »

Person taking out a slice of pizza from a pizza box.
Consumer Staples & Discretionary Shares

Why now is the time to buy the big dip on Domino's shares

Down 46% in a year, a leading expert forecasts brighter days ahead for Domino’s shares.

Read more »

Three people sit on safe cheering with pizza on table
Consumer Staples & Discretionary Shares

Food fight! Have Guzman Y Gomez shares outperformed Domino's since ASX debut?

Lets find out who’s topping the menu for investors

Read more »

Woman chooses vegetables for dinner, smiling and looking at camera.
Consumer Staples & Discretionary Shares

Here's the Coles dividend forecast from top analysts through to 2029

Can this defensive business provide pleasing payouts? Let’s take a look…

Read more »