If there's one good thing to come as a result of a selloff in the Australian stock market, it's falling valuations.
Like the discount rack at your favourite shoe store – or the pub – a lower price tag stretches your dollar further.
According to The Wall Street Journal (WSJ), 12 analysts currently have a 'buy' or 'overweight' investment rating on shares of Westpac Banking Corp (ASX: WBC).
With a total of 16 analysts polled, the consensus rating is overweight, with a price target of $34.75. One analyst has, however, placed a $38 price target on the shares, according to the WSJ.
The total number of analysts now bullish on Westpac shares is up significantly on the seven analysts who had buy or overweight recommendations just three months.
Source: Yahoo! Finance.
Indeed, following the 6.5% fall over the past three months analysts are clearly seeing an opportunity in Australia's second largest bank.
Are Westpac shares undervalued?
Prior to the recent market slump, I opined that my fair value estimate for Westpac shares lay somewhere around $27.67. Following the recent – extremely large – capital raisings by the major banks, my intrinsic value estimate will likely fall as a result of the increased amount of shares on offer.
I'm perhaps more bearish than other analysts, I'll admit; however, I think that against a backdrop of the slowing economy we'll likely see Westpac's – and other banks' – profit slow in the medium term.
Of course, there are profound limitations to all the assumptions used to create price targets, and as a prudent investor you should always take them with a pinch of salt.
That's why I believe it's imperative to purchase shares with a wide margin of safety. That is, buy shares only when the difference between what you think it is worth (i.e. price target, intrinsic/fair value, etc.) and what you can buy it for (market price) is worthwhile.
I assume a margin of safety of 30% before considering a purchase of most shares. Given Westpac shares currently trade with a margin of safety of 14% – the upside potential from their current market price of $30.45 to the price target of $34.75 – it wouldn't be enough for me to purchase the bank's shares – even if I was bullish.
