Woolworths

As a defensive business, Woolworths tends to attract investors when uncertainty abounds. This explains why the stock has outperformed the All Ordinaries index over the past month by about 8%. The jump in the share price over this period means the stock is getting closer to a downgrade.

The outperformance can’t be due to Dick Smith. The deadline for bids for the consumer electronics retailer is today, and reportedly there’s been little interest in an outright sale. This isn’t overly surprising; we said on 1 Feb 12 that ‘we expect buyers will be few ... and the sale price to be nominal’. It’s even possible Woolworths might end up retaining Dick Smith (or a stake in it), which would be an unfortunate management distraction.

On a completely unrelated issue, we have decided to lift the maximum portfolio limit for Woolworths from 5% to 7% (as foreshadowed in Why I can afford mistakes (and maybe you can’t) from 25 May 12). This reflects the fact that Woolworths is a much better quality business than most, and that shareholders should feel able to hold a higher proportion of their portfolio in it. The original 5% weighting is also somewhat inconsistent with our general suggestion to avoid over-diversification.

The increase in the portfolio limit to 7% does not necessarily imply you should increase your stake at the current price; we still recommend buying opportunistically, as on 9 Aug 11 (Buy – $23.89) for example. With Woolworths unlikely to report much profit growth in 2013, there’s some chance of disappointment over the next year.

The share price is up slightly since 23 Apr 12 (Long Term Buy – $25.88). For now, the Woolworths recommendation remains LONG TERM BUY.

Note: The model Growth and Income portfolios own shares in Woolworths.