Is the Woolworths share price in the buy zone?

Despite being resilient to the market sell-off in March, the Woolworths Group Ltd (ASX: WOW) share price has failed to kick on. Whilst the share price of supermarket giant Coles Group Ltd (ASX: COL) surges to record highs, the Woolworths share price is only 6.6% higher for the year.  

However, with various tailwinds emerging, the Woolworths share price could be in the buy zone for the medium term.

Why has the Woolworths share price been so subdued?

Firstly, as seen in other large cap shares such as CSL Limited (ASX: CSL), the Woolworths share price could reflect many investors rotating their portfolio. As higher growth opportunities emerge from the market sell-off, many investors would be selling their positions in high yielding companies for shares that are heavily sold-off.

In addition, the Woolworths share price could reflect the higher costs that could potentially eat into the positive earnings from higher sales during the pandemic. In the company’s most recent trading update, Woolworths cited $275 million in extra costs due to precautionary procedures imposed by the pandemic. These included such things as more cleaning and labour as well as extra warehouse space.

Second wave fears fueling demand

The COVID-19 pandemic is resulting in a relatively uncertain outlook over the medium term. With fears of a second nationwide lockdown growing, the essential services offered by Woolworths could become in greater demand. Woolworths is well positioned as a defensive company and could also see a growing yield as demand for essential goods accelerates.

Marley Spoon partnership and growth outlook

Earlier today, Woolworths announced that its venture capital arm, W23, converted its $2.95 million convertible bond into 5.9 million CHESS depository interests in meal box delivery company, Marley Spoon AG (ASX: MMM). Woolworths entered a 5-year partnership alliance with Marley Spoon in June 2019 and could benefit from the surge in demand for delivered meal kits.

In addition, with many consumers shifting to online shopping habits during the pandemic, Woolworths is investing heavily into adapting and growing its online presence. The supermarket giant plans to spend approximately $780 million on two automated distribution centres in Sydney.

Is the Woolworths share price a buy?

In my opinion, defensive shares with growth potential like Woolworths are worth keeping an eye on in the medium term. Given the uncertainty of the pandemic and the potential for more lockdowns, investors could pile back into defensive consumer staples businesses like Woolworths.

Instead of pre-empting an entry, I think a more conservative approach would be to wait until Woolworths has reported its full-year earnings to see how the company has handled the increase in costs and how it plans to grow in the future.

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Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. 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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