The inexorable rise of Commonwealth Bank of Australia (ASX: CBA) shares continues apace this week.
Shares in the S&P/ASX 200 Index (ASX: XJO) bank stock finished up 1.4% yesterday at a new all-time closing high of $181.10. Shares also notched fresh record intraday trading highs of $181.39.
In morning trade on Thursday, CommBank shares have given back a smidgen of those gains, currently down 0.1% at $180.94 apiece.
With 1.67 billion CBA shares outstanding, that gives Australia's biggest bank an eye-watering market cap of $302.2 billion. And it earns CommBank the honorary position of being the first Australian stock to have a market capitalisation of more than $300 billion.
It also widens the valuation gap between CBA and BHP Group Ltd (ASX: BHP), the second-biggest company on the ASX. BHP has a market cap of $192.7 billion. In July 2024, CommBank overtook the ASX 200 iron ore giant to become the biggest ASX stock.
Are CBA shares in bubble territory?
Most brokers have been forecasting a big retrace in CBA shares for well over a year now, with some share price targets as low as $100.
And yet the ASX 200 bank stock has surged ahead of all of its rivals to gain a whopping 46.5% over the past year. Not to mention the stock trades on a fully franked trailing dividend yield of 2.6%.
But along with that outperformance, CBA's valuation is also getting ever dearer.
Here's what I mean.
At current levels, CommBank stock trades at a price-to-earnings (P/E) ratio of around 30 times.
That compares to a P/E ratio of around 13 times for ANZ Group Holdings Ltd (ASX: ANZ) shares, around 17 times for National Australia Bank Ltd (ASX: NAB) shares, and around 16 times for Westpac Banking Corp (ASX: WBC) shares.
Commenting on the soaring CBA share price, Milford Asset Management's Jason Kururangi said (quoted by The Australian Financial Review):
For the active managers in the Australian market, most would probably consider it the biggest pain of their life. If I had a meaningful position, I'd be taking profits. It's in bubble territory, for sure.
Indeed, consensus analyst forecasts on CommSec have 10 strong sell recommendations, three moderate sells, and two hold recommendations. None are currently recommending CBA as a buy.
Why else is the bank's $302 billion valuation a problem?
With CBA shares up 47% in a year, the bank now accounts for about 12% of the ASX 200's value.
And according to specialist investment manager Martin Currie, that's a particularly big problem as CommBank shares change hands a lot less often than other large-cap stocks, meaning smaller stocks may be losing out on investor money.
"The concentration and dominance of certain stocks in the index is of concern to us as it may lead to high index/passive buying and lower turnover," Martin Currie stated (quoted by the AFR).
Commenting on the growing dominance of a handful of supersized companies on the ASX, Apollo Global Management said:
In Australian equities, the top 10 constituents of ASX comprise about 47% of the ASX 200 index, meaning that investing in the ASX 200 is largely a concentrated investment in the big four banks and a small number of large resource stocks such as BHP and Rio Tinto Ltd (ASX: RIO).
