Can Commonwealth Bank of Australia beat the S&P/ASX 200 from here?

Commonwealth Bank of Australia (ASX:CBA) shares are down more than 10%. Should value investors make their move?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If you're a shareholder of Commonwealth Bank of Australia (ASX: CBA), you'll no doubt be upset with its recent performance. Following years of dazzling returns, Australia's biggest bank has crumbled to its knees with the stock down 10.4% since peaking in July, putting it officially in the "technical correction" zone.

With the stock now trading at just $75.19 investors are starting to wonder whether now is the time to buy…

A closer look at Commonwealth Bank

As value investors, it is our goal to find investments that have a strong capability of beating the benchmark returns, measured by those of the S&P/ASX 200 (INDEXASX: XJO). We do this by identifying high quality companies that are trading at reasonable prices and have decent growth prospects moving forward.

While there is no doubting whether Commonwealth Bank is a high quality corporation, the bank's lofty valuation is an area of huge concern – even at today's discounted price. At $75.19, the stock still commands a P/E ratio of 14.2, a PEG ratio of 2.5 and a Price-Book ratio of 2.5. Although its P/E ratio is actually below that of the average ASX 200 company (roughly 15.1x), its future growth potential appears limited. In fact, I wouldn't be surprised if earnings grew by less than 5% per annum over the coming years, which makes its current valuation still excessive.

Investors also need to consider the strong headwinds facing the industry. One of the biggest risks right now is Australia's inflated housing market. While Commonwealth Bank controls more than 25% of Australia's mortgage market, it could be hit extremely hard if cracks begin to appear in the sector. Meanwhile, rising bad debt charges and aggressive competition across the finance sector could also restrict earnings growth.

Can Commonwealth Bank outpace the S&P/ASX 200?

Although Commonwealth Bank might seem like more of a compelling buy at its lower price, value investors should still avoid the lure of this big four bank. While the shares could certainly recover some of their value in the near term, I expect that, from its current price, the stock will still struggle to compete with the broader market in the long-run.

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

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »