“Both Woolworths (WOW) and Coles (COL) received a good lift as the Federal election campaign got underway, with both major parties proposing tax cuts and/or rebates for individuals,” he said.
“Investors swung behind consumer-exposed stocks. However, the support pushed WOW toward 4-year highs, and a forward P/E ratio of around 23.5 times,” he added.
“On the other hand, Coles is trading on around 18.5 times,” Michael said. “WOW has traded at a P/E premium to the market for many years, possibly due to the household name effect – many investors buy businesses that they know.
“Now that COL is a “clean” investment competitor, there’s an argument that the P/E gap between the two should close, notwithstanding differences in margins and growth rates. Investors holding WOW may consider selling outright, or switching into COL if they prefer to maintain an exposure to this market segment,” he said.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.