Commonwealth Bank of Australia (ASX: CBA) shareholders will be breathing a sigh of relief with the stock recovering 99 cents or 1.3% of its value yesterday. The stock recently hit a fresh five-month low at just $76.12 which reflected a startling 9.3% decline since its peak in late July.
Over the last 52 weeks, the bank's shares have traded between a low of $70.36 and an all-time high of $83.92.
Here are three reasons why the stock has fallen so severely in recent weeks…
1) Profit taking. Given the strong rallies experienced by each of Australia's big four banks, some profit taking was always going to be on the cards. At their highest point, Commonwealth Bank shares had skyrocketed nearly 250% since their GFC lows. Likewise, Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) have rallied 150% and 190% respectively.
2) Valuation. Although there was a while where investors seemed purely concerned with dividends, it seems that many are now recognising just how pricey bank stocks are. On a P/E ratio and Price-Book ratio, Commonwealth Bank is not only one of the most expensive banks in Australia, but also in the world.
3) Earnings potential. It's okay for a stock to have a high valuation when it has the potential to significantly boost earnings, but I fear that rising bad debts and heightened competition levels could impact its ability to grow profits in the coming years. In addition, its ability to maintain its dividend could be tested should the big four banks be required to hold additional capital in reserve.
This ASX stock is a better bet than the banks
Although the big four banks' shares have fallen in price, I would still suggest investors give them a wide berth. While their dividends are nice, I would argue they carry a higher level of risk than most investors think, given their high valuations and exposure to Australia's over-heated property market.
