The best time to buy stocks is when they’re cheapest. All investors will agree with that.
Yet when personal emotions are embroiled into our investing strategy, some investors can lose sight of the basic tenet of successful share market investing.
However, despite once being a bank shareholder myself, I can’t tell readers Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) are standout ‘Buys’ at today’s prices. Although each bank has a very different growth strategy and outlook for the near future, I believe that none of them are bargains.
ANZ, which is my favourite bank and most highly leveraged to the rising wealth of Asia’s middle-class, is the most fairly priced of the three majors, provided it can meet, or surpass, analysts’ expectations in FY14. However with shares trading on a trailing price-earnings ratio (P/E) over 15 and price-book ratio (P/B) of 2.05, investors who choose to buy shares today must believe the stock can meet the bullish expectations placed upon it, not only in FY14 but in the medium term also. I’m taking a slightly more conservative approach and believe ANZ trades at a premium to its intrinsic value and deserves a hold rating at today’s prices.
Like ANZ, Westpac too has been a direct beneficiary of falling interest rates. With over 12 million customers, a huge market share of household deposits and 23% of Australia’s home loan market, Westpac is held firmly in many long-term investors’ portfolios. And fair enough, they’ve done extremely well for shareholders over the past two decades. However in my opinion, Westpac, like ANZ, trades at a premium to its intrinsic value and with analysts’ estimating less than 10% earnings growth between now and 2016, I am not prepared to pay a P/B ratio of 2.26 for earnings growth which is unlikely to be enough to help the bank beat the market. As such, I believe Westpac is a sell.
NAB is in a different predicament altogether. Unlike ANZ and Westpac, its performance over the past 10 years is one which long-term shareholders would rather forget – its share price is up just 30% compared to a 59% return from the S&P/ASX200 Index (ASX: XJO) (INDEXASX:XJO). NAB’s woes stem (largely) from its UK exposure which includes a “run-off” portfolio of bad commercial property loans. Although it recently took the positive step of divesting some of its exposure and has sought to cut costs within its UK banking division, I am very cautious of buying shares today, even at their seemingly low valuation. For its dividend I think it’s a hold but it’s not a standout buy at today’s price, despite the chance of upside surprises come October 30’s full-year results presentation.
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It never makes me many (any) friends for saying Australia’s big banks are not a ‘Buy’ at today’s prices. Although I could be wrong and my bearishness now could turn around and bite me in a few years, I know the best time to buy bank shares is when the market suffers a severe setback and investors are fearful. Today is not that day.
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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in the companies mentioned.
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