Too many investors fall for the trap of assuming a company's historical performance is indicative of what to expect in the future. While a stock chart can be useful in helping to determine consistency of performance, or to give an indication of volatility levels, it should never be relied upon when it comes to buying new shares.
It seems as though Commonwealth Bank of Australia (ASX: CBA) could be a perfect example of this. Since the time of its inception into the Australian stock market in 1991, the bank has remained one of Australia's most beloved companies. In that time, its shares have risen a remarkable 1,121% from $6.82 to their current $83.29 price tag, while that figure is over 1,700% when dividends are included.
And of course, the bank's more recent performance certainly hasn't left shareholders disappointed either. The shares have jumped 13.3%, 108% and 165% over the last 1, 5 and 10 years, absolutely smashing the returns from the benchmark S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) Index and the bank's peers in each of those periods.
Yet still, the bank's shares do not present as a good buy today.
I'm sure there will be plenty of investors out there who would completely disagree with me when I say that. After all, CBA is one of the ASX's most widely-held stocks and would no doubt make up large portions of many investors' portfolios.
I completely understand that, and I wouldn't necessarily suggest the shares are a 'Sell' either. But at their current price, I would certainly not be buying. Instead of relying on a stock chart to reflect historical performances, investors need to consider two main points:
- The company's future prospects. That is, their ability to expand, or to grow earnings/dividends.
- The price they would be willing to pay for a share of that future.
Ignoring the recent controversy regarding the bank's financial planning arm, it would be difficult to find a higher quality Australian company. It is expected to report an annual cash profit greater than $8.5 billion when it reports next month and could continue to see that grow with interest rates remaining at just 2.5%.
But that all seems to be priced into the shares already, leaving little upside potential for investors who buy today. The same could also be said for the bank's rivals, namely Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ), which are all trading on high valuations. That means that the shares are unlikely to outperform the broader market in the long-run from this point onwards, given their pricey valuations.
A much better bet than Commonwealth Bank
Unfortunately, the greatest companies don't necessarily make for the best investments. While I don't think investors should necessarily sell their Commonwealth Bank shares, I certainly don't think they should be buying more.
