Why this fundie sold Woolworths shares and bought this ASX 200 stock instead

Why it could be time to go shopping for this retail share.

| More on:
A man sits in deep thought with a pen held to his lips as he ponders his computer screen with a laptop open next to him on his desk in a home office environment.

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

Woolworths Group Ltd (ASX: WOW) shares have done well in 2023 to date, rising by over 17%. But one fund manager now thinks there's a better opportunity to be found with a different S&P/ASX 200 Index (ASX: XJO) stock – Metcash Ltd (ASX: MTS) shares.

Woolworths is best known as a supermarket company, but it also supplies food to other businesses, it owns Big W and it owns a majority of the company that operates PETstock.

Metcash is a little different, but it's also a similar business. It supplies IGA supermarkets around Australia as well as independent liquor retailers like IGA Liquor, Bottle-O, Cellarbrations and Porters Liquor. Finally, it owns hardware brands Mitre 10, Home Timber & Hardware and Total Tools.

Is something going wrong for Woolworths shares?

According to reporting by the Australian Financial Review, portfolio manager Anthony Kavanagh from Chester Asset Management believes that on an "overall level", supermarkets "continue to generate mid-single digit topline growth of around 5%".

Chester Asset Management thinks that Woolworths is outperforming other supermarkets except Aldi.

In the latest quarterly update from Woolworths, being the 13 weeks to 2 April 2023, it said that total sales were up 8% to $16.3 billion, while Australian supermarket sales were up 7.6% to $12.3 billion.

Woolworths also said in that update that in the fourth quarter to date (meaning the month of April), the sales trend had been in line with the third quarter with "solid sales growth" in its food businesses.

Why did Chester Asset Management change to Metcash shares

The reason for the investment change to the ASX 200 stock was that the "relative value of Metcash versus Woolworths just got too wide."

Kavanagh acknowledged that some IGA stores may be losing some market share to larger stores and that the trade/home hardware volumes are softening.

What the fund manager likes about Metcash shares is that its valuation is "appealing" for the relative stability of its cash flows.

Chester Asset Management suggested that the Metcash share price is valued at 12 times FY24's earnings with a 5.9% dividend yield.

He compared those numbers to the Woolworths share price valuation being on a price/earnings (P/E) ratio of 25 times and a 2.9% dividend yield. Kavanagh said that Woolworths shares are defensive but expensive.

Latest trading update from the ASX 200 stock

In the first seven weeks of FY24, all pillars were "continuing to perform well" according to Metcash, with group sales up 2.3%.

In the food segment, total sales were up 6.8% excluding tobacco, or up 2% including tobacco.

In the hardware division, total sales were up 5% because of "continued solid underlying demand" and the contribution from acquisitions. Total sales were up 19.9%.

In liquor, total sales were up 1.2%, with some patrons spending less.

Metcash share price snapshot

Despite the ongoing sales growth of the business, the Metcash share price is down 13% in the last six months, as we can see on the chart below.

Motley Fool contributor Tristan Harrison 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 recommended Metcash. 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

A beautiful woman wearing make-up and long strings of pearls around her neck sits on a luxury old-style chair with an antique lamp beside her as she smiles happily with her head in the air as though she is very satisfied with something.
Consumer Staples & Discretionary Shares

I'd love to buy more Wesfarmers shares, but I won't right now. Here's why

It's hard to buy Wesfarmers when it's more expensive than Google...

Read more »

Couple look at a bottle of wine while trying to decide what to buy.
Consumer Staples & Discretionary Shares

Why is the Endeavour share price trading at all-time lows?

Let's take a look.

Read more »

domino's pizza share price
Consumer Staples & Discretionary Shares

Should I buy Domino's shares before the New Year?

Are Domino’s shares a good buy for 2025 after tumbling 50% in 2024?

Read more »

A man holds his hand under his chin as he concentrates on his laptop screen and reads about the ANZ share price
Consumer Staples & Discretionary Shares

Kogan shares worth $17 million sniffed by corporate watchdog

A well-timed and lucrative sale has the regulator intrigued.

Read more »

A man folds his arms as he stands amid a stack of used tyres.
Share Market News

Here's how the ASX 200 market sectors stacked up last week

The consumer staples sector came out best during a poor week of trading for the ASX 200.

Read more »

supermarket asx shares represented by shopping trolley in supermarket aisle
Consumer Staples & Discretionary Shares

Is the Coles share price a buy amid its 2025 outlook?

With its outlook in mind, are Coles shares a bargain?

Read more »

asx company executive with multiple fingers all pointing at him
Consumer Staples & Discretionary Shares

Woolworths shares slip amid criminal charges laid in NZ

The supermarket is in hot water across the ditch.

Read more »

Woman and 2 men conducting a wine tasting
Consumer Staples & Discretionary Shares

Treasury Wine share price jumps on big China news

The popular Penfolds brand may have found its home in China.

Read more »