Should You Buy Metcash Limited at This Price?

What happened to the Metcash share price?

The Metcash Limited [ASX:MTS] share price lost marginally today, while the Aussie stock index struggled for gains. The rebound in the energy market overnight has not helped the commodity stocks very much, and that has been a drag for the entire market in today’s trading.

Why did MTS shares do this?

Metcash has been one of the big ‘loser’ stocks in the past 10 years. The stock almost exhibited a negative correlation against the market, doing much worse than the index in the past three years. However, the stock has become a spectacular rebound stock in the past months. It has naturally caught the attention of many investors.

Market analysts still have a consensus ‘Outperform’ rating on the stock. Most see growing sales but shrinking earnings in 2017. The stock is by no means expensive, not after the big fall over the last few years. However, Metcash is a relatively high beta stock, meaning it does track the market quite a bit.

The company pays a reasonable dividend. Over the past five years, sales have been growing at a positive rate. Financially, the company is liquid with plenty of interest coverage. The company is not terribly burdened by debt. The biggest concern is still its negative net operating margin. Note, gross margin is still positive.

What now for Metcash Ltd?

Metcash is on my radar due to its momentum tendencies. I am the analyst for Emerging Trends Trader, and I am always watching the Aussie stock space for potentially great momentum stocks. Metcash, being a big comeback stock, naturally falls into the emerging trend category.

The retail sector which Metcash belongs is a very competitive space. The consumer stocks did reasonably well during the economic downturn, but investors need to be selective about them. Some of them are going to win with some to lose competitiveness.

Metcash as it is now, is a comeback story, it is a momentum story and is a potential value story. Investors may invest in the stock for the short term momentum potential, or take a long term value view on the company, but they will need to be aware of the competition in the space.

Regards,

Ken Wangdong,
Editor, Emerging Trends Trader


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