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% in dividends 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 is not just income, it’s about managing risk.
WOW shares recently fell by around 20% since the May 2014 high of $38.92 and are currently trading at around $32.75. Although WOW may find support, there is still a risk of a further fall to around $30.00. Therefore, the plan 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.
Just as there are levels which provide support as the market falls, there are levels that the market will meet resistance at when it rises. You will have heard me talk about 5400 points as being important for our market in previous reports, this where the market may meet resistance as it attempts to push higher from here. However, the real test for the All Ordinaries Index will be whether it can build sufficient momentum to break the 5500 point level over the coming weeks, in time for Christmas. The Santa rally that the brokers talk about often occurs in late November, or early December.
Not helping the market’s cause this week was softer investor sentiment brought on by disappointment in the Medibank Private float, resources stocks softened, and the political debate about government infrastructure spending, and whether or not a number of major projects will proceed.
Dale Gillham is Chief Analyst at Wealth Within