It's been a tough week for investors who have watched the Australian sharemarket collapse out from under them.
Less than two weeks ago, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) recorded its highest closing price in seven years at 5,982.7 points with confidence and expectations of another interest rate cut both riding high.
In the time since however, the landscape has completely changed and investors don't know what to do with themselves. The ASX 200 has retreated more than 5.7%, led down by some of the market's most popular and widely held stocks, and there are signs there could be plenty of room left to fall.
Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and Woolworths Limited (ASX: WOW) are amongst the stocks deserving of the most attention, having played a key impact in the market's broad selloff. The question is, what should investors do with them?
Commonwealth Bank
Unlike its Big Bank rivals, which all produced their interim results this week, Commonwealth Bank only provided a quarterly update. While the bank remains well and truly on track to generate a higher full-year profit than in 2014, its third quarter net profit was actually below that recorded in the year-ago period ($2.2 billion, compared to $2.3 billion).
While it spared very little information – leaving much to the market's imagination – it did say that expenses were higher in the quarter and that its net interest margin (a key measure of bank profitability) had continued to contract as a result of aggressive competition. At the same time, the decline in bad debt charges narrowed, leaving investors to wonder whether the bank's growth story had finally reached a conclusion.
Commonwealth Bank's shares have fallen 14% since they peaked in March, but that's no reason to buy them. Further falls are very possible whereby the bank's shares remain overpriced, even at $83.11.
Woolworths Limited
While the Big Four banks have attracted the most attention, investors in Woolworths made sure to punish the retailer for its poor performance for the three months to 31 March, 2015.
Overall group sales declined by 1.6% during the period, weighed down by a 35.2% fall in sales from its Petrol division. Investors weren't happy with the lacklustre sales growth generated in its Food and Liquor division either, with sales growing just 2.3%. That compares to the 5.4% sales growth recorded by Coles – owned by Wesfarmers Ltd (ASX: WES) – in the same time period.
While the issues facing Woolworths will be no overnight fix, management has undertaken a strategic review and identified ways in which it will improve moving forward. To begin with, it has flagged considerable cost reductions and intends to refurbish stores and improve the customers' experience in the form of lower prices and superior service.
The shares have fallen 7% since the results were released on Wednesday morning and hit a fresh two-year low of $27.45 during Thursday's session, giving investors a remarkable buying opportunity.
Westpac Banking Corp
Westpac is in a very similar boat to Commonwealth Bank. Westpac reported its interim results on Monday, much to the market's dismay. The bank's profit remained flat compared to the prior corresponding period, coming in well below the market's expectations, while its CEO Brian Hartzer provided a rather questionable outlook.
To make matters worse, the bank said it would be issuing $2 billion worth of new shares under its Dividend Reinvestment Plan in order to increase its capital buffer. This is something that investors have been concerned about in recent months.
Like Commonwealth Bank, Westpac is an expensive investment prospect – especially when you consider the headwinds facing the sector and the economy as a whole. From its current price tag of $33.90, it's difficult to imagine the bank generating market-beating returns in the long-run.
With the Big Four banks all heading south, investors need to ensure they are prepared for anything.
