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5 big reasons to avoid Commonwealth Bank of Australia shares

Shares of Commonwealth Bank of Australia (ASX: CBA) have staged a significant comeback over the last two weeks. Roughly $8 billion has been returned to the stock’s market capitalisation as the shares have recovered 7.1% since bottoming out at $73.57 last Tuesday.

But while the stock might be considered one of the ‘safest’ on the ASX and offers a lucrative, fully franked dividend, it is by no means a compelling buy. In fact, I’ll go on the record as saying it wasn’t even a compelling buy when it recently entered into a “technical correction” – defined as a 10% fall in price.

Here are five big reasons why investors should continue to avoid Commonwealth Bank of Australia stock…

  1. The market knows what you do. Given its size, Commonwealth Bank is one of Australia’s most widely covered companies by analysts and market commentators. After years of solid growth, investors who think they’ve found some value that the rest of the market hasn’t yet realised may want to think again.
  2. Valuation. Although it’s trading at a discount compared to its July all-time high, the stock still commands a lofty price. Trading on a P/E ratio of 14.9x and a Price-Book ratio of 2.6x, it’s even more expensive than Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ).
  3. Earnings headwinds. Rising bad debt charges, intensified competition as well as the high likelihood of stricter capital requirements could certainly impact CommBank’s ability to grow earnings in the coming years. It could even affect the bank’s ability to maintain or increase its dividend payments.
  4. Housing market. I’m not forecasting a bursting of the so-called “housing bubble”, but I am concerned about Commonwealth Bank’s exposure to the sector. Australia’s property market is red-hot right now but should cracks start to appear, Commonwealth Bank’s shares could be hit for six.
  5. A plethora of alternatives. It still astounds me that investors are so attracted to an overpriced bank stock when there are so many more attractive alternatives. This is particularly the case following a sharp selloff of Australian shares recently.

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

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