Australian shares have become increasingly expensive over the last few years as the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has risen to fresh heights, led by some of the nation's most widely-held stocks.
But over the last six weeks or so, there has been a significant pullback which has opened the door to some reasonable buying opportunities. Indeed, the market is trading 1.6% lower again today and even some of the country's blue-chip stocks have begun to look cheap!
But investors still need to remain cautious – while some stocks have moved back into 'buy' territory, others remain significantly overpriced. Let's take a look at whether that applies to companies such as Medibank Private Ltd (ASX: MPL), Westpac Banking Corp (ASX: WBC) and Woolworths Limited (ASX: WOW)
Medibank Private
Australia's largest health insurance business reached a high of $2.59 late in February, but has been stuck in a downward trend ever since. In fact, it has fallen 2.4% today alone to trade at $2.03 per share, which is the lowest price in its short history (its previous low was at $2.08).
Medibank is a quality business, but investors have learned the hard way that not all quality businesses make for sound investments. Investors had been relying on management's ability to improve costs and operating efficiencies but it seems that will be a much slower process than first thought. Meanwhile, competition in the sector is heating up from the likes of BUPA, HCF and NIB Holdings Limited (ASX: NHF), which could hinder Medibank Private's ability to continue performing.
Although it is trading at a considerable discount to its February highs, it is still an expensive investment prospect. Investors would be wise to add the stock to their long-term watchlists and remain patient for an even better buying opportunity.
Woolworths
Woolworths has for a long time been regarded as one of Australia's strongest blue-chip corporations. But over the last 12 months that theory has been questioned and the stock has plunged more than 27% as a result.
Indeed, the market's concerns are justifiable. Primary rival Coles is challenging Woolworths' dominance in the core supermarket space (as are Aldi and Costco), while its Masters Home Improvement chain remains heavily cash-flow negative. In fact, the ABC recently quoted retail analyst Rob Lake as saying: "The disastrous rollout of Masters has been the greatest own goal in recent Australian business history."
However, the retailer has recognised the need to strengthen and revamp its core supermarket business which will come at the expense of bettering Masters. While this will likely have an impact on near-term earnings potential, long-term investors should see this as a step in the right direction to improve its customers' experience and make its prices more competitive.
At $27.58, Woolworths seems like a reasonable buy and is expected to yield 5% fully franked. Grossed up that's a massive 7.2% dividend yield!
Westpac Banking Corp
Each of Australia's 'Big Four' banks have been caught up in the market-wide sell-off over the last six weeks and have all fallen into a "technical correction" – that is, they have fallen more than 10% since their respective peaks. But none of the banks have fallen as heavily as Westpac which finds itself an agonising 19.1% down from its 52-week high of $40.07.
The bank's fall from grace can be attributed to a number of factors. To begin with, the stock had become wildly overpriced as a result of the market's insatiable hunger for solid dividends, while that desire has subsided somewhat now that investors believe the latest interest rate cutting cycle has drawn to a close.
At the same time, the bank released a disappointing half-year earnings report last month which prompted investors to rethink their growth forecasts. It was also forced to raise capital, diluting shareholder ownership, while it also indicated that the sector's dividend payout ratios had peaked.
Like Medibank and Woolworths, Westpac is a high-quality company but now is the wrong part of the cycle to buy. With strong headwinds facing the banking sector as a whole, Westpac is closer to a 'sell' than a 'buy'.
