Australian equities have been sold off heavily in recent months with investment bank Goldman Sachs declaring that local shares are trading at their cheapest levels in nearly a decade, as highlighted by the Fairfax press.
Indeed, shares have been brought back to far more reasonable levels since April with the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) now hovering around the 5600 point mark, down from nearly 6000. That is perhaps especially the case for some of the nation's biggest and most widely-held stocks which have dragged the market lower.
With that in mind, is now the time to scoop up a bargain on companies such as Commonwealth Bank of Australia (ASX: CBA), Woolworths Limited (ASX: WOW) and Medibank Private Ltd (ASX: MPL)?
Commonwealth Bank
Australia's largest bank has generated enormous returns for shareholders in recent years, in the form of both capital gains and fully franked dividends. The catalyst for this was the low interest rate environment which saw bad debt charges shrink to record lows as well as a strong property market which bolstered demand for home loans.
But after hitting an all-time high of $96.69 in March, the stock plunged towards bear market territory, bottoming out at $79.19 last week. It has since regained some strength to trade at $84.26 on the back of encouraging comments from legendary investor, Warren Buffett.
Although Commonwealth Bank appears to have ceased its rapid descent, the stock is still an expensive investment prospect for investors looking for long-term, market-beating returns. At its current price, it trades on a ratio of 15.1x forecast earnings and a price/book ratio of 2.8x – both of which are well above its long-term averages.
Despite its discounted price tag (compared to March, at least), I would argue that Commonwealth Bank is a 'hold', at best.
Medibank Private
Medibank Private was the talk of the town from the time of its November 2014 public float to February, over which time hype and momentum pushed the stock to a record high of $2.59. But since the release of its first-half earnings numbers, investors have been left somewhat deflated, selling the stock down to just $2.06 – a 20.5% decline.
At the time of its initial public offering (IPO), the market applauded the fact that Medibank was Australia's largest health insurer, and that it had the capacity to drastically reduce costs and improve operating efficiencies. Unfortunately, investors bid the stock to unreasonable levels based on the assumption that those improvements could be made almost overnight – an assumption which has since been proven wrong.
There is no doubt that Medibank is a high-quality business, but at its current price tag it still seems like an expensive prospect. In my opinion, investors would be best to add the stock to their watchlist and wait for an even greater opportunity before buying.
Woolworths
Woolworths dominated the news headlines on Wednesday after it announced the shock resignation of its CEO, Grant O'Brien, whilst also delivering yet another earnings guidance downgrade. Normally, such a combination would warrant a heavy sell-off of the stock but instead, the market responded by bidding it as much as 2.8% higher during the day. It ended the session down just 0.1%.
Woolworths has come under enormous pressure over the last 12 months due to the competitive pressures from primary rival Coles, owned by Wesfarmers Ltd (ASX: WES), and Aldi. It has recorded lacklustre sales growth in its core supermarket division while its Masters Home Improvement chain also remains heavily cash flow negative. In my opinion, a change of management will be good for the embattled retailer, allowing a fresh set of eyes to guide the company moving forward.
Personally, I still like Woolworths and think it would be a good buy at today's price. In saying that however, yesterday's announcement has also introduced a number of uncertainties regarding the company's future which investors certainly need to remain mindful of.
