The Coles Group Ltd (ASX: COL) rallied to a record high today as it’s one of the lucky few to benefit from the COVID-19 outbreak. But is it too late to buy shares in the supermarket giant?
The Coles share price gained 0.3% to $17.96 on Tuesday while the Woolworths Group Ltd (ASX: WOW) share price eased 0.2% to $38.41 and the Metcash Limited (ASX: MTS) ended flat at $2.77.
Triple COVID-19 benefit
Shares in all three stocks held up reasonably well through the coronavirus pandemic as panic buying of groceries amid the lockdown lifted sales.
But there’s two other benefits. Discounts given at the supermarkets started drying up as they didn’t feel the need to tempt customers to shop with price promotions during the frenzy.
This also meant that the market remained rational as the supermarkets didn’t have to aggressively compete against each other.
Grocery price inflation easing
The result is borne out in grocery prices. Inflation at Coles and Woolies jumped around 3.5% year-on-year in the June quarter compared with 1.8% in the previous quarter.
Greater volume and rising prices are great news for supermarket earnings, although UBS warns that the inflation momentum is easing, particularly for dry goods.
“Inflation post-COVID-19 panic buying remains supportive of a rational market; promotional intensity is broadly easing; and range continues to grow as retailers aim to differentiate,” said UBS.
“That said, easing dry-goods inflation into Jun-20 and supplier expectations suggest inflation tailwinds are likely to slow moving forward.
“By retailer, relative inflation at Coles is lower vs. [Woolworths].”
Coles share price vs. Woolworths share price
While the broker is upbeat on the sector, it rates Woolworths and Metcash a “buy”, and Coles as “neutral”.
Industry feedback suggests that Woolies is beating Coles and the broker likes the former for its top-line outperformance and long-term growth opportunities. It also thinks Metcash is cheap.
Foolish takeaway
Given the increasing risk of another COVID-19 outbreak in New South Wales and the second shutdown of the Victorian economy, I too think the sector is an attractive safe harbour and have a slight preference for Woolworths.
This is largely because the Coles share price has outperformed with a 21% gain since the start of calendar 2020 compared to an 11% loss by the S&P/ASX 200 Index (Index:^AXJO).
In contrast, Woolies only managed a 6% gain even though management has a better track record than Coles, in my view.
Having said that, I don’t think it’s a bad idea to buy both stocks. As I’ve repeated a number of times, valuation alone isn’t the reason to buy or sell ASX shares in this highly unpredictable environment.
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- 3 ASX shares to buy before earnings season
Motley Fool contributor Brendon Lau owns shares of Woolworths Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Woolworths Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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