According to an article in The Australian Financial review, National Australia Bank Ltd (ASX: NAB) is the top pick amongst bank analysts at Morgan Stanley and Credit Suisse.
I recently penned an article giving three reasons why NAB could outperform the market in 2015. The reasons include a divestment of its long-troubled UK banks, investors' predilection for fully franked dividends and an improved profit performance. But I'm still not so sure if NAB is a good pick.
Over the past 10 years NAB has easily been the worst performing big bank, as write-offs and wild swings in annual earnings took their toll on investor sentiment.
Simply assuming a stock will perform better because it has performed badly in the past is not a reason to buy.
Sure, you may get lucky if you time your speculation correctly, but successful investing is all about time in the market, not timing the market. And an investment in NAB at today's prices would be anything but certain.
NAB shares, like those of its peers, may look cheap on a dividend yield and earnings per share basis but it's important to look beneath these metrics – and to the future – to get a truer picture of their valuation. I can tell you, it's not great.
It would also be wrong to assume NAB is 'cheap' by simply comparing it to its big four peers, like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC). In my opinion, they are definitely not cheap, so comparison would not be a prudent way to benchmark or contextualise NAB's valuation.
Buy, Hold, or Sell?
If I held NAB shares I wouldn't be rushing out to sell, but as an investor I am certainly not buying them. They could buck the 10-year trend and surprise the market in 2015 but its track record and valuation leads me to believe it won't be a good surprise.
