Woolworths, I can’t love you any more

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CBA.AX78.89-0.120
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WOW.AX37.74-0.190

Every stock in your portfolio should be available to sell, at the right price, including Woolworths, writes Bruce Jackson of The Motley Fool.

“Dow average extends record high…” screamed the headline on Bloomberg.

In case you’ve just dropped in from a stint driving trucks in the Pilbara, you’ll know this week the Dow Jones Industrial Average hit a record high, surpassing its previous record set in October 2007.

That’s what 0% interest rates can do for a stock market.

Here in Australia, although the ASX is still a long way off its record highs, investors in blue chip favourites including Commonwealth Bank (CBA.AX), Westpac (WBC.AX), Wesfarmers (WES.AX) and Woolworths (WOW.AX) have good reason to be pleased with themselves.

You may have noticed Woolworths shares now trading at close to an all-time high, including jumping an astounding 40% over the past 12 months.

I recently spent time deep-diving into my family’s long-held Woolworths shareholding.

First bought in 1993 at the original IPO at $2.45 per share, with dividends reinvested, a very modest initial investment in Woolworths has morphed into a very substantial amount of money.

Woolworths and the 4 life-changing investing lessons

The whole exercise served to remind me of a number of important investing lessons…

  • Buy and hold investing is not dead. The only time it is dead is when practised with the wrong stocks. Buy and hold a bad company at your financial peril.
  • Patience is key. Three years after floating, Woolworths shares were back trading at close to their IPO price. Impatient investors might have sold out, and missed out on the meteoric rise from $2.60 in 1996 through to around $35 today.
  • You could have bought Woolworths shares in 1999, after they’d already doubled from their IPO price, and still seen your investment rise 600%. Averaging up into great companies is a far better investment strategy than averaging down into your dogs. Don’t water the weeds.
  • Dividends matter. A lot. Reinvesting dividends, perhaps through a dividend reinvestment plan (DRP), turns a great investment into a life-changing amount of money. Woolworths has been a great investment.

I can’t love you any more, Woolworths

In the years ahead, especially from today’s starting valuation, Woolworths is likely to be only a fair investment, not a great one.

Elephants don’t gallop, and with a market capitalisation of $44 billion, a P/E of 19 and a dividend yield of less than 4%, Woolworths simply cannot grow at the same rate it has in the past.

I don’t know about you, but when I invest my family’s money, I don’t look for fair investments, I look for great investment opportunities.

Woolworths shares, at over $35, just don’t cut the mustard any more, so much so, that a couple of weeks ago, I sold a portion of my family’s holdings.

An old, wise Foolish Investor once told me shares don’t love you, so don’t you fall in love with them. Every stock in your portfolio should be available to sell, at the right price.

Woolworths at $35 was the right price for me. I’ve loved you, you’ve loved me, but now it’s time to move on… to greener pastures.

Speaking of such pastures, Motley Fool Share Advisor Investment Analyst Scott Phillips has recently been spotted fossicking around the small-cap sector.

Judging by the chart below, showing the widening gap over the last 12 months of the share price performance of the S&P/ASX 50, including companies like Woolworths, and that of the ASX Small Ordinaries index, he might be on to something.

Source: S&P Capital IQ

When it comes to stock picking, Scott’s got a pretty good track record.

Just under a year ago, readers of Take Stock might remember Scott naming Harvey Norman (HVN.AX) as a buy.

Get Stuffed

It was a controversial call.

Feedback at the time was almost all universally negative…

“Thanks. Is this a short sell tip?”

“GET STUFFED”

“What would appear to be a declining trend in a business faced with constant deflationary price pressure, even in their best years, becomes a cascade of operating de-leverage on ALL FRONTS with no respite. And 5.5% as a yield is just not enough safety margin to provide buffering in event of further material declines.”

Tough crowd, to say the least.

Fast forward to today and guess who’s having the last laugh?

Since that recommendation, Harvey Norman shares are up 36% versus the market’s gain of 18%.

Patience.

Conviction.

Skill.

Foolish Investing.

Many investors, seeing the growth in the share price of the banks and Woolworths will jump on these bandwagons — after the many of the gains have already been enjoyed. They run the risk of ‘buying high’ only to ‘sell low’ if a subsequent fall scares them back out of the market.

Foolish investing offers an alternative — we think a much better way.

We find great businesses with strong business momentum AND with plenty of room to run.

They say ‘trees don’t grow to the sky’ — you try doubling in size when you’ve just earned $3.8 billion in six months, as Commonwealth Bank have just done.

Instead, we assemble a combination of fast-growing businesses and companies with deeply discounted share prices -– and, even better, a small number that share both characteristics.

That’s how we plan to not only enjoy gains in the coming years, but to beat the market return in the process.

The Australian Financial Review says “good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit.” Get “3 Stocks for the Great Dividend Boom” in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

More Reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Motley Fool General Manager Bruce Jackson has an interest in Woolworths, Westpac, Wesfarmers and Commonwealth Bank. 

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