The Commonwealth Bank of Australia (ASX: CBA) share price has bounded higher in recent months (and years!).
At the current CBA share price of around $81.50, Australia's largest bank trades at over 2.3 times the value of its assets — well above the banking sector average of 1.3 times. The average of companies included in the market, or S&P/ASX 200 (INDEX: ^AXJO) (ASX: XJO), is 1.5 times.
Moreover, using a measure of profit instead of assets, CBA shares trade at 15 times their profits per share. This is above the market average of 13.5 times.
Finally, according to analysts surveyed by The Wall Street Journal, the consensus rating on CBA shares is a 'hold' with the average price target being $80.41.
Should you short sell CBA shares in 2017?
Clearly, Commbank shares are not cheap. However, two characteristics must be evident to make a short-selling opportunity worthwhile, in my opinion. The two characteristics are:
- Structural headwinds with a rich valuation. The market misses most industry headwinds until the share prices have collapsed. By then, it is too late. In terms of risk, the elephant in the room for bank shares is property prices. If property prices start to fall it would present a structural challenge for the banks, likely to persist for years. Although it is unlikely the banks will disappear altogether, their balance sheets would be stretched considerably. Would investors be willing to pay 2.3 times the bank's assets (loans, buildings, etc.) if the housing market started to wobble? I doubt it. Given CBA's rich valuation it makes it even more vulnerable to a reversal. However, it is also the highest quality bank on the ASX, in my opinion.
- A catalyst. The catalyst part is what's missing in a CBA short sell story, in my opinion. Every good short sell should have a catalyst to send the company's share price down. In Commbank's case, a sudden drop in the property market would hurt it — but for years people have been saying the property market would fall and it hasn't. Short selling requires you to be right about a company's poor state of affairs and for the investment thesis to play out quickly.
Foolish Takeaway
Short selling is a high-risk process, which makes you money if the company's share price falls. They work best when no-one sees it coming — a la Bellamy's Australia Ltd (ASX: BAL). In these instances, share prices fall ferociously.
While Commonwealth Bank shares appear expensive and could face trouble as we stare down the barrel of choppy house prices, there is no near-term catalyst to spark a sell off.
As a result, I do not think it is a standout buy, nor a standout sell. Perhaps the analysts' 'hold' rating is spot on… at least, until property prices turn.
