Is it time to short Australia's big bank stocks?

The share prices of Commonwealth Bank of Australia (ASX:CBA) and Westpac Banking Corp (ASX:WBC) don't look cheap, but a fall in price mightn't be imminent.

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To many of us, a long-only investment portfolio is all that we know.

To be long means we're wagering an assets price will go upwards. You buy low, sell high.

The benefits of a long position are easily understood. For example you get dividends, potential for capital gains, voting rights etc.

However short positions can also be an extremely useful tool in the arsenal for savvy investors.

Whilst these positions are usually reserved for those with intimate knowledge of valuation and large amounts of capital; the increasing prevalence of exotic securities, broking platforms and derivatives make it more appealing to the lay investor.

And perhaps the timing couldn't be better.

Tightening US monetary policy, a struggling domestic economy and rising equity markets are likely to compel investors to try their hand at profiting from falling prices.

Short-selling is the act of taking shares from a lender (broker, index fund etc.), selling them at a high price, then buying them back it a lower price and pocketing the difference.

Whilst it sounds simple, it's not exactly easy.

It's hard enough to identify overvalued securities but usually you'll also require a catalyst for a selloff.

Is it time to short bank stocks?

For a long time, Australia's big four banks – Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) – have been called 'overvalued'. Indeed I personally believe this to be true.

However they will make hard targets for short sellers because they're very well-run businesses and offer great dividends in a low interest rate environment.

So whilst they may be highly leveraged (each have "assets" aka loans, over 15 time's their equity), with current high share prices, they're still unlikely to be heavily sold off without a significant catalyst, such as a meaningfully higher unemployment rate or house price crash.

But that's not to say they're bulletproof, either.

According to ASIC's reported daily short positions list for the 16th of December 2014, 1.36% of all Commbank shares were reported as short positions, the next highest was Westpac at 1.17%. NAB and ANZ were closer to 0.6%, which could be indicative of their lower relative valuations. Clearly, some believe they're not worth their current price tags.

Indeed, at today's prices, Commbank and Westpac trade on price to tangible book values of 3.51 and 2.82, respectively, whilst ANZ and NAB have PTBV's of 2.27 and 1.92.

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. You can follow Owen on Twitter @ASXinvest.

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