Aussie investors were treated to some tasty gains in ASX shares during 2024. But as we embrace the new year, not all stocks are running hot, and some could face headwinds in 2025.
Both the Commonwealth Bank of Australia (ASX: CBA) and Lynas Rare Earths Ltd (ASX: LYC) finished December trading in the red.
Lynas shares fluctuated throughout the year but finished 2024 more than 10% in the red after a 6% slide this past month alone.
Meanwhile, Commonwealth Bank had one of its strongest years on record, finishing 37% in the green. But the uptrend was bucked in December, with shares sliding more than 3% last month.
Based on recent comments from experts, I think these two ASX shares could be already facing some headwinds this year. Here's why they might need a closer watch.
Valuations matter for ASX shares
Commonwealth Bank's share price surged to highs of $161 apiece last year, a mammoth jump from its lows of $109.52 in late 2023.
But experts reckon the price might have run ahead of the fundamentals. For reference, the bank posted earnings per share (EPS) of $5.69 in FY24, down from $6.09 the year prior.
The consensus of analyst estimates also projects the banking major to earn $6.30 per share this year, an 11% increase.
Advisory firm BW Equities has raised the caution flag on Commonwealth Bank following its double-digit rally last year.
The firm says the ASX share's market value has moved "too high too rapidly", according to The Bull.
"Investors may want to consider cashing in some gains," he said.
And the BW Equities isn't alone. Plato Investment Management says the ASX share's valuation remains a primary concern, noting "CBA looks expensive relative to other banks".
Plato also noted the bank was more than 60% more expensive than global banking giant JPMorgan Chase & Co (NYSE: JPM).
Meanwhile, Sebastian Mullins of Schroders Australia prefers buying the bank's bonds due to its stock price valuation. Speaking to the Australian Financial Review:
CBA equity looks excessively priced with a price-to-earnings ratio [P/E] higher than Google.
From this, I think investors should be cautiously watching Commonwealth Bank's next moves, especially from a valuation standpoint.
Lynas Rare Earths: Bumpy terrain ahead
Lynas Rare Earths caught a bid after the halfway point of 2024, with shares rallying from August lows of $5.83 apiece to their peak of $8.09 on November 8.
Shares then sold off rapidly into the end of the year and now fetch $6.46 apiece, a 20% markdown.
Why the volatility?
The ASX share is at the helm of the rare earths market, which includes two metals known as neodymium and praseodymium (NdPr). Side note — funnily enough, neither is actually that 'rare'.
After surging 21% from July to September, neodymium prices have since retreated 9% from this high to sell at CNY 497,000 per tonne.
According to Trading Economics, they remain more than 67% off their previous high of CNY 1.51 million per tonne in February 2022.
As a result of this softer rare earths market, Lynas' revenues were down 6% in Q3 2024 despite selling 24% more rare earths oxide (REO).
The consensus of analyst estimates is neutral on Lynas, rating the ASX share a hold, according to CommSec.
Whilst consensus estimates project strong growth for the company – EPS of 21 cents in FY25 versus 9 cents last year – the neutral rating indicates the group of brokers see plenty of risks involved as well.
Goldman Sachs is neutral on the company, downgrading it from a buy to hold in an October note.
The broker lowered its production forecasts on Lynas for 2025 and reduced its FY25 estimates for EPS by 43%.
It saw the ASX share as "relatively fully valued" at the time, given its price target of $7.30 per share. Lynas now sits just 13% below this mark.
The company's shrinking cash balance — $413 million in cash and equivalents at the end of Q3 2024 –could potentially add to concerns.
As my Foolish colleague Bernd reported, this totalled a 54% drop from its cash balance the year prior.
Unless NdPr prices stage a sharp recovery, I think investors should be carefully watching these risks for Lynas.
Foolish takeout
These ASX shares could pose challenges for investors in 2025. Commonwealth's valuation remains a concern for brokers, whereas for Lynas, it all depends on the rare earths market.
Regardless, remember to always keep a long-term investment horizon in mind.
