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  • All Ords Report 07 Apr 2015

All Ords Report 07 April 2015

Long term investors are very passionate about their Woolworths (WOW) shares, and the GFC certainly strengthened this resolve, with the shares having fallen less than the market at that time. However, even when the reverse is true, and recently this has occurred, some investors will continue to hold no matter how far the shares fall. But what’s the risk, and why put any company on such a high pedestal?

Investors argue that WOW is in the top 20 listed Australian shares on our market and they are able to walk right into one of the stores, which provides a sense of comfort. However, most investors are just attracted to the 4.5 per cent dividend paid to them each year, which is all very well, but if your capital is being eroded as the price falls, what is the dividend really worth? In my opinion, investing in WOW is not just about income, it’s about knowing the risk you are willing to take.

During the GFC, WOW shares initially continued to rise as the market began to fall, achieving a high of around $35.05 in December 2007. In the thick of the financial storm, the stock fell away swiftly, with the entire fall from the high to the low in July 2008, representing a decline of more than 30 per cent. This fall was less in both degree and time, when compared to the 55 per cent fall on All Ordinaries Index, which continued to decline into March 2009.

The recent weakness in WOW shares is mostly attributable to its investment in Masters Home Improvement. Last month, Woolworths and US partner Lowe's, invested an additional $90 million. While this may not sound like much for WOW, with a market capitalization of around $39 Bn, this capital injection brings the total investment in the hardware joint venture to $2.91 billion. The market is concerned about the current losses, and there is no clarity as to just how much more money will be needed. Also, the break even for WOW’s investment in Masters was expected to be in 2016 and has now been pushed out to 2019. Therefore, you can understand why the market has sold the shares down.
Further to this, the Australian Competition and Consumer Commission announced a recall of dodgy electrical cable imported from China, and this supplier has since collapsed. A number of hardware companies, including Masters, were involved. It is currently estimated that around 40,000 homes and businesses are effected, and risks include electrical shock or fires. The market is still digesting this one.
Since the high of $38.92 in May 2014, WOW shares have fallen by around 21 per cent and are currently trading at around $30.65. Although WOW may find support at around this level, there is still a risk of a further fall to between $28.00 and $30.00 in the short term. Given this, your plan for WOW ought to be to collect the income when times are good and have a strategy to exit, or take some money off the table, when your risk dramatically increases.

So what do we expect in the market?

Mid-week the Australian share market was quite buoyant, rising 56 points during Wednesday’s trade, however buying slowed the following day, which saw the market close just below 5400 points.

As I have shared with you before, just as there are levels which provide support as the market falls, there are levels where the market will meet resistance when it rises. Lately we have been seeing the market test some of these important levels. You will recall from my previous reports how the 5400 point level has been important for the All Ordinaries Index in the past, and this is where the market has again met resistance to the recent rise.

Although the real test for the All Ordinaries Index will be whether it can build sufficient momentum to turn around and push back up towards the 5500 point level in time for Christmas. The Santa rally, talked about widely by brokers, often occurs in late November, or early December. However, given the fall on our market yesterday, a rally prior to Christmas would need to start soon, otherwise we may have to wait for a post-Christmas rally, sometime after New Year.

So what is this increased volatility about?

One of the biggest reasons for the recent decline was OPEC’s decision last week to not slow the production of oil. This action saw a sell-off in the Energy sector in the US late last week, and the selling followed in the same sector on our market.

Not helping the market’s cause last week was softer investor sentiment brought on by disappointment around the Medibank Private float – the shares dipped to around $2.08 on Wednesday, however, they did manage a recovery to around $2.17 by Friday’s close as some investors elected to increase their holding.

Another factor for the market last week was the political debate about government infrastructure spending, and whether or not a number of major projects will proceed. With so many things happening in the lead up to Christmas it is understandable for the market to be a bit more volatile.

All Ords Chart 02 December 2014

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