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Falling bank prices are good for investors

This morning BBY, Australia’s biggest non-bank owned stockbroker, has upgraded all of our big banks to a BUY rating.

The stockbroker has given each bank target prices significantly below what they previously set. Westpac (ASX: WBC), which has fallen significantly over the past two months has been given a target price of $28.50, which is only nine cents above its current price.

ANZ’s (ASX: ANZ) target price was cut 14% to $28.50, a figure that represents a 1% rise on current prices. NAB’s (ASX: NAB) target price was cut 12% to $30, which is very likely given the company’s higher than usual dividend.

Commonwealth Bank (ASX: CBA) is tipped to reach $70 per share but currently trades at $67.63. However, it already has a P/E of 14 which (since it doesn’t have much growth prospects) indicates that investors are buying the share for security and income which, as we know, becomes less appealing the higher the share price gets.

No one can predict short-term share prices with certainty, but finding good business models and strong management will set you up for long-term gain. Banking stocks are great safety and income plays but the biggest risk to investors is inflated share prices. It’s important to buy at the lowest price possible, where the dividends are highest and the company has less risk of being overvalued.

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Motley Fool contributor Owen Raskiewicz owns shares of ANZ.

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