3 reasons to avoid buying Westpac Banking Corp

Did you know the Australian share market has achieved an average yearly return over 10% for the past 30 years?

That’s despite a dotcom boom and bust, GFC and countless other financial and political fiascos.

Yet, few DYI investors actually manage to meet or beat the market’s average. Why? Because many lack the skills or time necessary to comprehensively analyse a wide group of stocks and even fewer have the temperament to match.

When a stock falls, many investors will question themselves and are prone to making rash decisions. Conversely when a stock price climbs, they fall in love and forget about the downside risks.

Buy high and sell low rarely makes for adequate investment returns.

As a perfect example, at today’s prices, the market has fallen in love with big bank stocks. Particularly the two largest banks, Westpac Banking Corp (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA).

After all, each bank has handily outperformed the market over the past two decades and both currently pay strong fully franked dividends.

However despite their success, there are a number of reasons why investors should avoid buying in now…

1. High Valuation. Westpac currently trades on a price to tangible book value of 2.75 and price earnings ratio of 13.25. This is above its long-term average and includes all the benefits derived from falling bad debts.

2. Lack of sector fragmentation. In recent years, Westpac has bought its growth. From the likes of St.George and RAMS to spin-offs such as BankSA and Bank of Melbourne. Moving forward, with fewer opportunities available, increased regulation and oversight by government bodies, the bank won’t be able to pursue the same strategy with as much success. Consequently, analysts are forecasting earnings per share growth as low as 2% per annum for the next three years.

3. Better opportunities. Given the sheer size of Westpac, current level of house prices and sluggish growth in the Australian economy (which includes high unemployment and the end of a mining boom), top line growth will be harder to come by. Meanwhile there’s many other ASX-listed companies which are cheaper, offer fully franked dividends and have far greater growth prospects.

For example, The Motley Fool's top analyst Scott Phillips recently declared one cheap but growing ASX technology company, "The Motley Fool's Top Stock for 2015". It has a juicy fully franked dividend and comes loaded with heaps of growth potential. Best of all: You can his #1 pick for FREE in our investment report!

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.

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