Source : THE AGE NEWS
In February last year, something looked weird about the skyrocketing Commonwealth Bank stock price. At $115 a share, its price had risen well above its value. By July, weird gave way to bizarre as CBA’s share price hit $127.
On Tuesday morning, it smashed through the $173 mark, and with the bank’s stock hitting a new record every other day, Australia’s biggest bank is now sailing in what analysts define as “bubble territory”.
CBA stock trades where the air is thin.Credit: Eamon Gallagher
And that’s no contrarian view, legions of highly skilled (and highly paid) investment bank analysts are united when it comes to pointing out CBA’s “gravity-defying” bull run.
The average investor just isn’t interested in what the experts have to say.
Almost every analyst has either a “sell” or an “underperform” (a more polite way of saying “sell”) rating on CBA. Macquarie Equities and Barrenjoey both have a 12-month price target of $105 on the bank’s share price. That’s nowhere near the rarefied air CBA is kissing right now
There is a huge rump of retail investors who bought shares when CBA originally listed in 1991 at $5.40 per share and have since steadfastly refused to sell the stock.
So, the highly respected investment banks that have been ringing the alarm bells louder than ever on CBA’s meteoric share price rise being “unjustified” arguably have some thinking to do.
If investors had actually acted on their advice and sold CBA shares, they would have missed out on a 41 per cent gain (that’s $50 a share).
In February 2024, when the CBA share price was sitting at $115, I noted that analysts watching CBA were engaged in an uncomfortable game of share price Twister, as they stretched themselves into ever more uncomfortable contortions to explain why the bank was such a hit with buyers even as its fundamental-based valuation suggested it should be in retreat.
Given where CBA’s shares are currently trading, those contortions must now be close to bone-breaking
Technically, the experts are right. CBA is obviously a well-run bank and probably deserves a premium over its peers, but based on its current and prospective near-term earnings, the doesn’t deserve its market value of almost $290 billion.
And with every record that CBA notches up, these experts look more wrong-footed.
Veteran banking analyst Brian Johnson from MST Financial has had a stab at explaining the disconnect and whether this time around the analysts have got it wrong.
He posited a theory last year that CBA’s shares were the unique beneficiary of a cyclonic tailwind of popularity that dates back to its float some 30 years ago. He diverged from the pack and placed a “hold” rather than a “sell” and he maintains that position, despite acknowledging that the stock is expensive.
The way he explains it, there is a huge rump of retail investors who bought shares when CBA originally listed in 1991at $5.40 per share and have since steadfastly refused to sell the stock.
CBA boss Matt Comyn has presided over a remarkable period of share price growth for the bank.Credit: Rhett Wyman / SMH
Given how far CBA’s share price has soared since its listing, selling the stock would mean a lot of mum-and-dad investors would cop a big tax on the profit they have made. So, they choose to instead enjoy the steady income that the bank’s dividends provide.
As for institutional investors, they can’t get enough of CBA, creating a latent demand that keeps the share price at a premium.
Johnson says when looking at the dynamics of CBA’s price he is reminded of a video about a Hermes Birkin crocodile skin bag – there is only one of it, but four people want it.
But CBA’s rise is a shock to the system and there are ample reasons to be perturbed. And cautious.
This is a company whose earnings growth is expected to be subdued and well short of spectacular. There is nothing in the short term that suggests its earnings will have a growth spurt, indeed, it is operating in a highly competitive market and facing what most economists believe to be slowing economic growth and even the potential for some pressure on all the banks to sustain dividends at current levels.
So, the analysts seemingly exposed for making the wrong call on the bank may yet be vindicated at some point.
