Icarus Signal New Entries: Oz Banks Even Higher Priced

This story features WESTPAC BANKING CORPORATION, and other companies. For more info SHARE ANALYSIS: WBC

Update on share prices and consensus price targets.

By Rudi Filapek-Vandyck

In mid-August, I concluded that Australian banking shares had started to look rather expensive with most share prices trading above or near consensus price targets. I also suggested that, contrary to historical observations, this time elevated valuations probably would not trigger a sell-off for the sector and/or for the share market in general. That was before Uncle Ben at the US Fed opened all spigots of monetary liquidity to remove any downside to risk asset prices.

Nearly two months later and what have we gained in knowledge and insights? Well, bank share prices first weakened, a little bit, but they have become simply more expensive since as the rotation into cyclicals proved short-lived and still today lacks conviction. I think there's a real risk that defensives and financials will continue to carry the weight of pushing the market higher leading into 2013, unless we see some genuinely solid economic improvements and a general reduction in skepticism and concerns. What are the chances?

No wonder recent indications are that global funds managers are participating in today's rallies with an ever so shorter time horizon. Bank share prices may yet continue revisiting higher price levels driven by ongoing dividend appeal and expectations of more rate cuts by the RBA, but the conundrum for longer term oriented investors remains that buying at elevated valuations virtually never leads to fantastic returns further down the track. Yes, it is a true conundrum. Just ask any fund manager you can talk freely to.

In the meantime, one easy to draw conclusion is that Westpac ((WBC)) has regained the second position in Mr Market's rankings for Australian banking shares. Westpac shares trading well above consensus target may serve as the ultimate evidence for this. ANZ Bank ((ANZ)) is now equally above target. Yet THE big surprise from the past weeks has been National Australia Bank ((NAB)). Believe it or not, but NAB shares are now trading above target too. I cannot even remember the last time this has happened.

All this poses the ever so ubiquitous question: is this market finally ripe for a pull back? Elevated valuations for major banks in Australia certainly would suggest this is the case, but elevated valuations alone are never enough. The market needs a catalyst, something to trigger profit taking without the banks losing their dividend appeal. Any guesses anyone?

Over the next month, the banks (except CommBank ((CBA))) will release full year results and prior to this, starting this Monday, the third quarter profits season starts in the US. Maybe we don't need anything from Europe or China to temper the overall enthusiasm? It's a big IF, given the short term orientation of present market participants and the absence of long term investors in today's share market.

Maybe the conundrum simply continues until investors finally have a concrete reason to start loading up on cyclicals again… (could take a while though).

In the meantime, Icarus reports Bank of Queensland ((BOQ)) too is now approaching price target, as is insurer QBE ((QBE)), but so is gold and copper producer Newcrest ((NCM)) as well as gold producer Evolution Mining ((EVN)). In fact, there are now 42 stocks near target and another 91 stocks are trading above target. The latter group includes all big four banks (see above) as well as Woolworths ((WOW)), Wesfarmers ((WES)), The Reject Shop ((TRS)), Oceana Gold ((OGC)), Kingsgate ((KCN)) and Insurance Australia Group ((IAG)).

I am sure everybody else can see a few similar themes in both lists.

In the Bottom 50 we find the usual suspects: biotechs and many smaller and micro cap energy and mining hopefuls. Plus, increasingly, engineers and resources services providers as they really are doing it tough right now. Incredible but true, between late last year and March this year this used to be the Go To sector in the Australian share market. If you do have a strong stomach, take a peek as to what has happened to share prices of Boart Longyear ((BLY)), Mastermyne ((MYE)) and Ausdrill ((ASL)) since, among others.

I would suggest there is a broader lesson in all of this. It's okay to jump on current market momentum to seek a few extra gains from what's happening in the share market, but better not mix short term with longer term horizons. Investors who did pre-March through joining the Bubble in resources services providers are still licking their wounds today, with no compensation in sight for those beaten down share prices.

Investors should consider the information and data are provided for research purposes only.

Stocks <3% Below Consensus

Order Symbol Current Price($) Consensus Target($) Difference(%) 1 DXS $ 0.98 $ 0.986 0.61% 2 NCM $ 28.24 $ 28.455 0.76% 3 SIP $ 0.68 $ 0.681 0.89% 4 SLR $ 3.80 $ 3.84 1.05% 5 BOQ $ 7.96 $ 8.053 1.17% 6 pbg $ 0.62 $ 0.631 1.77% 7 FLT $ 25.46 $ 25.965 1.98% 8 ASX $ 30.09 $ 30.741 2.16% 9 ORL $ 6.69 $ 6.836 2.18% 10 OTH $ 0.53 $ 0.54 2.86% 11 QBE $ 13.49 $ 13.89 2.97%

Stocks Above Consensus

Order Symbol Current Price($) Consensus Target($) Difference(%) 1 NAB $ 26.15 $ 26.05 – 0.38% 2 ANZ $ 25.30 $ 25.174 – 0.50% 3 IOF $ 2.97 $ 2.953 – 0.57% 4 tcl $ 6.16 $ 6.124 – 0.58% 5 CCP $ 6.60 $ 6.50 – 1.52% 6 FBU $ 5.87 $ 5.74 – 2.21% 7 SRX $ 10.18 $ 9.30 – 8.64%

Top 50 Stocks Furthest from Consensus

Order Symbol Current Price($) Consensus Target($) Difference(%) 1 HIG $ 0.16 $ 0.25 61.29% 2 MYE $ 1.68 $ 2.65 58.21% 3 ASL $ 2.79 $ 4.389 57.31% 4 MDL $ 5.63 $ 8.80 56.31%

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