4 stocks you’d love to buy, but shouldn’t

The big banks may look appealing but the risks outweigh the rewards.

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The share prices of big banks have had a stellar run and it seems it can go on forever.

Over the past year they’ve climbed strongly and even the worst performer – Commonwealth Bank of Australia (ASX: CBA) has risen in excess of 11% not including dividends. Over the past 10 years, three out of four of the big banks’ share prices have easily outperformed the S&P/ASX200 Index’s (ASX: XJO) (^AXJO) rise of 57% to record some very impressive capital gains.

The Commonwealth Bank’s share price is up 131%, Westpac Banking Corp (ASX: WBC) is up 93% and Australia and New Zealand Banking Group (ASX: ANZ) is up 70%. National Australia Bank Ltd’s (ASX: NAB) 13% gain isn’t as impressive.

However, that’s not including dividend distributions and when factored into the equation the banks have returned 213%, 166%, 142% and 67%, respectively. Quite a spectacular return indeed and it has no doubt left some previous shareholders with a few regrets.

However good things eventually come to an end and it seems most analysts have made up their minds on the big banks. As recently as last year the Commonwealth Bank took out the title of: “The world’s most expensive bank.

So if you’re asking yourself if now is a good time to buy, the answer might not be an unequivocal yes. The fact is, all of the big banks are not cheap and buying at current prices could leave you with more to lose, than gain.

Another huge risk to the banks is their leverage to the Australian property market, with Commonwealth Bank and Westpac holding around 50% of mortgages. The rise and rise of Australian house prices has grown disproportionately to household income and more and more Australians are taking on interest only loans, assuming the upward trend will continue for a long time.

I’m not predicting the end of an era but it does pose a threat to a majority of bank earnings. As an example, post-GFC, Suncorp Group (ASX: SUN) was slapped with $17 billion in bad debts when the Gold Coast property market (and others) fell to its knees. It took them five years to pay it off and its share price is still down 40% since October 2007.

As for the big banks’ record profits, investors need to see the bigger picture. Recent profits are being propped up by low amounts of bad and doubtful debts (a no-brainer given the low interest rate environment) and huge demand for cheap credit. It won’t be as easy for them to peel off huge profits once interest rates rise and bad debts grow. And they will.

Foolish takeaway

Every investor would love to add the big banks their portfolios purely for the big dividends and relative safety of a household name. However the higher price you pay for stock the greater the downside risk you take on. At current prices, the big banks are very expensive and have their backs against the wall, with a majority of them still searching for reliable growth initiatives, you shouldn’t be buying them at current prices.

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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