Despite the Reserve Bank of Australia keeping official interest rates on hold today – as opposed to cutting them, which ordinarily is a boon for high-yielding companies – shares of Westpac Banking Corp (ASX: WBC) have soared.
Up 3.3% to $33.57 in late afternoon trade, Westpac shares have bucked three months of falls, which yesterday left them nursing losses of around 18% – compared to falls of just 7% in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
As a result of today's share price gains; however, Westpac is now punching into positive territory for the year – up 0.98%.
After reacting to a lacklustre half-year profit result and a sombre growth outlook by CEO, Brian Hartzer; Westpac shareholders have also contended with Eurozone woes and a slowing local economy.
Is it time to buy Westpac?
Despite still being down 16% since their record high in March and April, I believe Westpac shares are grossly overvalued. My estimate of fair, or intrinsic value for Westpac shares lies somewhere around $27.
That price, of course, factors in the slower credit growth environment and the likelihood of a medium-term uptick in bad debt charges.
However, given that valuation forecasts and 'price targets' always prove wrong sooner or later, prudent value investors should aim to buy shares at a discount to this price. Therefore, I wouldn't be tempted to buy Westpac shares until they dropped back below $25.
