Time to buy? One Australian stock that hasn't been this cheap in years

This ASX stock is cheaper than its P/E ratio suggests.

| More on:
A photo of a young couple who are purchasing fruits and vegetables at a market shop.

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

When an Australian blue-chip share reaches a level not seen in years, it's normally enough to make ASX investors on the hunt for cheap ASX stocks sit up and pay attention. 

For one, they might actually already own this share and be wondering why things aren't going so well (particularly amid the current ASX bull market).

For another, investors who don't already own shares of this stock might be wondering whether they are staring a potential bargain buy in the face.

Woolworths Group Ltd (ASX: WOW) is arguably one such cheap ASX stock.

This consumer staples share has had one of its roughest years in recent memory over 2024 to date. Woolworths shares have spent 2024 in a state of freefall.

Back at the start of 2024, Woolworths was trading at just over $37.50 a share. But today, those same shares are trading for just $30.18 each, representing a rather horrid 19.5% drop over this year so far. Woolworths shares are now at their cheapest levels since COVID-ravaged 2020.

That contrasts starkly with the broader S&P/ASX 200 Index (ASX: XJO), which has jumped more than 10.6% over 2024 and hit several new all-time highs in the process.

Check out this disparity below:

Created with Highcharts 11.4.3Woolworths Group + S&P/ASX 200 Price Return (AUD) PriceZoom1M3M6MYTD1Y5Y10YALL1 Jan 202428 Nov 2024Zoom ▾Jan '24Mar '24May '24Jul '24Sep '24Nov '240www.fool.com.au

Not a great look.

So, how did Woolworths get here?

Woolworths' not so merry 2024

Well, it seems to be a combination of factors. Investor confidence in this now cheap-looking ASX stock first began to waiver when Woolies released its half-year earnings report back in February.

These earnings were not well-received, with the company seemingly losing market share to Coles over the first half of its 2024 financial year. However, at the same time these challenging earnings were released, Woolworths CEO Bradford Banducci simultaneously (and suddenly) announced his resignation.

Subsequent quarterly updates, as well as Woolworths' August full-year earnings report, seemed to confirm the trend of Coles snapping up Woolies' market share.

Not much else has seemed to go right for Woolies this year. The company has also faced allegations of anti-competitive behaviour and potential industrial action in the leadup to the crucial Christmas period.

Is this a cheap ASX stock?

So, with Woolworths' steep share price decline in 2024, many investors might wonder whether it is now a cheap ASX stock.

Well, it looks like it is. Woolworths' 2024 full-year report was a bit of an accounting mess, thanks to some significant writedowns. As such, the company officially trades on a rather misleading price-to-earnings (P/E) ratio of 343.8 right now.

Using the company's more sensible 'group basic earnings per share before significant items' metric of $1.40 per share, which can be thought of as effective earnings per share (EPS), we get a current P/E ratio for Woolworths of 21.6. That's actually below Coles Group Ltd (ASX: COL)'s present earnings multiple of 22.

Now, it's almost unheard of for Woolworths to be a cheaper ASX share than Coles on a P/E basis. To my knowledge, it hasn't happened in the six years that Coles has been an ASX share in its own right.

This is why Coles and Woolworths are trading on nearly identical dividend yields right now. At the time of writing, Coles shares offer a yield of 3.67%, with Woolies at 3.43%. Again, this is highly unusual by normal ASX standards.

So Woolworths is incontrovertibly a cheap ASX stock today, at least judging by its historical pattern.

Does a cheap stock mean a buying opportunity for Woolworths?

But a cheap ASX share doesn't automatically translate into a buying opportunity.

If Woolworths continues to lose market share to Coles, its value as a business will probably continue to decline. For Woolworths to be a buying opportunity today, in addition to just being a cheap ASX stock, it will need to right the ship and start regaining its former mojo.

One ASX expert who thinks that might indeed be the case is investment bank Goldman Sachs. As we covered earlier this week, Goldman's analysts "believe that WOW's structural advantages of its store network, scaled online position and leading data/analytics capabilities will enable market share wins in the medium term". As a result, this broker has given Woolworths shares a 12-month price target of $36.20.

Let's see if Goldman is on the money here. Only time will tell.

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 positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has positions in and has recommended Coles Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Cheap Shares

a smiling picture of legendary US investment guru Warren Buffett.
Cheap Shares

I'm listening to Warren Buffett and buying cheap ASX shares

Attractively valued ASX shares are a great call right now, in my view.

Read more »

Dog with a shoe in its mouth.
Cheap Shares

I think these 2 cheap ASX shares are buys for value investors

These businesses could be too cheap to ignore.

Read more »

An Australian farmer wearing a beaten-up akubra hat and work shirt leans on a fence with livestock in the background and a blue sky above.
Cheap Shares

Why I think these 2 ASX 300 shares are steals

These ASX shares have a lot of potential, in my view.

Read more »

Smiling couple looking at a phone at a bargain opportunity.
Cheap Shares

2 cheap ASX 200 shares that look too good to ignore today

Cheap shares are hard, but not impossible, to find right now.

Read more »

A cool dude looks back at the camera while ziplining above the treetops.
Cheap Shares

2 great ASX shares to buy in July: experts

These companies have a lot going for them. Here’s why.

Read more »

A young women pumps her fists in excitement after seeing some good news on her laptop.
Cheap Shares

In an expensive market, 2 ASX 200 companies too cheap to ignore

These two businesses seem far too cheap for what could happen next.

Read more »

a man and a woman kneel in a boxing ring with exaggerated make-up injuries, posing in humorous stance with the woman leaning back on her knees and the man leaning against her bright pink boxing glove as he gasps for air.
Cheap Shares

Is it time to buy these 2 beaten-up ASX shares in 2025?

These ASX shares could be great buys right now.

Read more »

Man smiling at a laptop because of a rising share price.
Cheap Shares

Why this fund manager bought this ASX 300 share for bigger returns

A fund manager thinks good things can happen with this rising ASX share.

Read more »