ASX:WOW

With Woolworths trading back below $27.50, we believe the share price now represents good investor value.

The $26.50 – $27.00 price range is an attractive buying opportunity.

On a rally back above $28.00, we recommend selling $29.00 Euro-style March call options to enhance the return.

Woolworths goes ex-dividend for $0.43 on the 1st of March.

Our ALGO engine triggered a buy signal for WOW on Monday at $27.45.

This “higher low” pattern is referenced to the $26.40 low posted on April 20th.

WOW shares have been drifting lower for the last two months and are now consolidating in the $27.30 to $27.60 range since going ex-dividend for 60 cents last week.

With the current share price trading at 22x earnings, we see the stock as good value above the $27.00 level.

WOW was added to our ASX Top 20 model portfolio on August 22nd. Our medium-term target is $29.40

Woolworths

We recommend buying Woolworths and selling a March $29.01 European-style call option to enhance the yield.

Unlike American-style options, European-style options can only be exercised on the expiration date.

As such, the share price can trade through the strike price during the course of the option duration without being exercised.

The strategy delivers effectively 3 payments, September & March dividend, plus another $0.55 per share in option income.

Woolworths

Our ALGO engine triggered a buy signal for WOW on August 23rd at $28.25.

Since then, the share price has has traded in a relatively narrow range between $28.80 and $28.20.

The technical picture has improved and internal momentum indicators are now in oversold territory.

We see good support in the $28.00 area with an upside target near $30.00 over the medium-term.

WOW goes ex-dividend for 50 cents on September 13th with a special dividend of 10 cents, for a total of 60 cents.

Woolworths

Our Algo Engine has triggered a buy signal in WOW following the recent sell-off from $30.50 back down to yesterday’s close at $28.25.

Woolworths goes ex-div $0.50 on the 13th of September and we recommend accumulating the stock now , ahead of the dividend and then looking to sell $29.00 covered calls to enhance the income.

Woolworths

We’re looking for a retracement in Woolworths’ share price back to $28.50 and recommend accumulating within the value range displayed below.

WOW goes ex-div $0.50 on the 7th of September. Adding a covered call will boost the cash flow to 10 – 12% on an annualised basis.

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Consensus expectations for the upcoming Woolworths’ earnings result, is for underlying profit to grow by 8 – 10%. This is well above competitors, but hardly supports the current 24 x multiple.

If the sell-off in WOW extends to the downside, we would encourage investors to “load up” on Woolworths. Our target buy range is $28 to $29.

Based on forward earnings WOW trades on 3.2% dividend yield. We’d like to see that increase to 3.6% as the share price retraces. Keep this one on the radar and watch for the next ALGO buy signal.

Woolworths

Whilst the grocery industry’s profitability is improving, (as the industry becomes more rational), we’re cautious on Woolworths’ share price due to valuation concerns.

Industry analysis shows Woolworths sales momentum is slowing. With the stock now trading 23 x consensus FY19 earnings, on a forward yield of 3.3%, there seems little margin for disappointment.

We continue to track Woolworths for a new “higher low” formation, at which point the stock will be added into the ASX 50 model at a discount to the current trading range.

Woolworths 1H18 EBIT was up 10% on the same time last year and 1H18 NPAT came in at $900 million, an increase of 15%.

Earnings Per Share (EPS) for FY18 is likely to be around $1.35 and if we assume moderate growth into FY19 and FY20, with an EPS range $1.40 to $1.60, the stock trades on a forward yield of 4.1%.

On the above calculation, fair value for WOW is near the $26.50 range.

Woolworths