In years gone by, Commonwealth Bank of Australia (ASX: CBA) was seen as one of the safest stocks going around. Oh how times have changed…
Shares in Australia's biggest bank have dropped 11.2% in the last two months and have acted as a heavy drag on the overall S&P/ASX 200 (INDEXASX: XJO) as a result. While many investors argued that it was still great value even when it was trading near its peak, most are now concerned about just how far the stock could fall. With the stock now trading at roughly $74.50.
Is Commonwealth Bank a safe bet for your money?
Despite the stock's heavy falls recently, there are a number of reasons to suggest there could be even more pain in store for investors over the coming weeks or months. Here are four reasons why Commonwealth Bank still does not present as a good buy…
- Australian economy. Chinese growth is waning and the iron ore price is plummeting, making Australia's economy look far less attractive for foreign investors. In addition, billions of dollars are being wiped from Australia's GDP which could well affect growth over the coming years which would have a direct impact on lending activity.
- US economy. To expand on the above point, foreign investors have been attracted to the Australian economy due to our high yielding stocks. With many now having become wildly overpriced (more on that in a moment), those investors are now reverting back to the US where interest rates are likely to increase sooner rather than later.
- Property market. The major banks are all exposed to Australia's red hot property sector with Commonwealth Bank commanding the biggest share of the market. The Reserve Bank has recently expressed its concern over the rising property prices and, should cracks start to appear, Commonwealth Bank could be the hardest hit.
- Valuation. In addition to all the risks facing the sector, Commonwealth Bank is just plain expensive. With limited growth opportunities over the coming years, it's difficult to justify its lofty valuation which has it trading on a PEG ratio of 2.5 and a Price-Book ratio of 2.5. Despite their recent setbacks, Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB) are also still expensive right now.
BONUS reason why not to buy Commonwealth Bank
With the bank's excessive valuation in mind, there are far better opportunities presenting themselves right now – especially given the market's recent pullback.
