3 reasons I’m not buying Commonwealth Bank of Australia

The S&P/ASX 200 (INDEXASX: XJO) index is trading 0.5% lower today, dragged down by a number of big-name stocks now trading ex-dividend. Not even Commonwealth Bank of Australia (ASX: CBA) was spared with Australia’s largest bank trading 24 cents or 0.3% lower after it sank below the $81 level earlier in the day.

Although it is trading at a small discount compared to its price last week, you won’t find me venturing too near the stock. Here are three reasons why…

  1. Valuation. Despite today’s minor setback, the stock is still far too expensive for my liking. At $81.06 per share, Commonwealth Bank is trading on a lofty P/E ratio of 15.3. Considering its limited growth prospects, that price is by no means a bargain.
  2. Momentum. It seems that momentum has played a part in driving the bank’s shares upwards – the higher it has climbed, the more investors have tried to squeeze out of it. However, that momentum seems to have cooled in recent months, raising doubts as to whether it could again challenge its all-time highs near the $84 price mark any time soon.
  3. Better opportunities. Its dividend yield remains attractive but I struggle to see why investors are still so eager to buy an overpriced stock when there are so many others trading at far more attractive prices.

A better buy than Commonwealth Bank

Right now, there is a strong possibility the capital gains recognised from the stock in the coming years will be less than impressive, so it seems investors would be much better off deploying their capital into stocks with greater upside potential.

As a perfect example, Top Motley Fool investment advisor Scott Phillips has just named his #1 dividend-paying stock for 2014-2015. With solid growth prospects and a fat, fully franked dividend, this ASX stock could be a huge winner for your portfolio. Discover the name and code FREE by clicking here now.

Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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