Icarus Signal Update: Banks Are Not Cheap (Full Stop)

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

Daily update on share prices and consensus price targets.

By Rudi Filapek-Vandyck

Hard-nosed, long term investors whom (according to the latest Investor Survey) still have some 44% exposure (on average) to the share market will be pleased to learn that, throughout all of the daily noise and uncertainties, the ASX200 has effectively added 174 points thus far this year. This translates into a gain in excess of 4%, any dividends received during the period not included.

Alas, as has been the case on most occasions post 2008, the devil is in the finer detail. Turns out, the Australian share market indices have been carried along by strong performances by the major banks, and little else. UBS analysts have calculated of the 174 points in gains booked so far this year, no less than 132 points can be attributed to the banks. That's more than 75%. It'll be more once we throw in dividends because the banks have been, and still are, providers of market-beating dividend payouts. It's for that very reason they have outperformed this year in the first place.

Yes, life has been tough for those investors whose portfolios do not include Australian banks. The above mentioned analysts at UBS report banks have outperformed the broader market by 4% in July, by 8% for the quarter and by 19% over the last year.

This, of course, now raises the question as to how much longer this outperformance can last? Banking specialists at UBS, for example, now believe the race to access solid and reliable dividends has run too far. In line with conclusions drawn elsewhere, the analysts would not recommend investors continue to pile up on bank shares. In fact, from a portfolio reweighting perspective, UBS has advocated its clientele move Underweight the sector on the expectation that bank share prices have now reached their ceiling in terms of fundamental valuations.

No wonder "banks" are all the talk of town this week, and yesterday I responded as follows to an enquiry from one FNArena subscriber:

Thanks for the feedback, the input and the question. I intend to address “the banks” in a separate story this week, but in general here’s what I know is or has been happening in support of bank share prices:

– Specific dividend-oriented strategies have been promoted heavily by stockbrokers and others (think about 3x dividends in 13 months and so forth)
– US hedge funds have been caught on the wrong side of their ill-advised short positions and market talk has it some have been forced to cut losses
– Some experts have been promoting the banks on the back of more RBA easing expected for the months ahead

This suggests that once these drivers start faltering, bank share prices will look towards a much tougher environment, especially since there is no support from the earnings front (very low growth ahead anticipated by market consensus).

My personal observation/past experience tells me we are probably looking towards a blow-out peak whereby share prices may well reach higher in the short term, but a sizeable correction should announce itself next. If history repeats, this “correction” will not only impact on the banks but on the share market in general. (I have written extensively about this correlation in years past)

As far as my personal favourite indicator goes, both Commbank ((CBA)) and Westpac ((WBC)) are now trading above consensus price target, while ANZ bank ((ANZ)) is closing in rapidly. I think FNArena's Icarus Signal is warning everyone who cares to pay attention that bank share prices are bloated, inflated, too expensive for their own good.

Now… let’s see how long it will take for history to repeat itself?
 

Special note to all dividend seekers out there: investing in dividend stocks has the same characteristic as buying bonds. As an investor, one still has to keep an eye on the likely direction of the price and not solely focus on the yield. Because relatively benign moves in the price can and will have a significant impact on the ultimate return achieved. Understand this and your total investment returns will improve markedly.

On the other hand, one alternative scenario is to simply take a long term view and solely focus on the yield on offer, the growth in future yield and the risks attached to these two considerations. Because if the first two factors remain in place, the share price will, over time, follow too. (In terms of total investment return it still pays to watch your entry price, though).

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 GPT $ 3.43 $ 3.44 0.17% 2 tcl $ 6.12 $ 6.18 0.92% 3 WDS $ 0.48 $ 0.49 1.04% 4 IRE $ 6.70 $ 6.87 2.58% 5 ANZ $ 23.54 $ 24.15 2.59% 6 DWS $ 1.55 $ 1.58 1.94% 7 SGT $ 2.74 $ 2.80 2.19% 8 AUB $ 7.30 $ 7.49 2.64% 9 MAD $ 1.30 $ 1.33 2.31% 10 BEN $ 8.20 $ 8.22 0.28% 11 RDF $ 2.05 $ 2.10 2.44% 12 REA $ 13.69 $ 14.04 2.55% 13 GEM $ 0.96 $ 0.98 1.56% 14 TRU $ 5.29 $ 5.41 2.27% 15 SMX $ 5.72 $ 5.78 0.98% 16 AAD $ 1.32 $ 1.35 2.27% 17 BOQ $ 7.65 $ 7.84 2.46% 18 GNC $ 9.21 $ 9.31 1.07%

Stocks Above Consensus

Order Symbol Current Price($) Consensus Target($) Difference(%) 1 ALS $ 2.05 $ 2.04 – 0.68% 2 TPM $ 1.94 $ 1.92 – 0.62% 3 TGR $ 1.27 $ 1.26 – 0.40%

Top 50 Stocks Furthest from Consensus

Order Symbol Current Price($) Consensus Target($) Difference(%) 1 RXM $ 0.81 $ 1.76 117.28% 2 COK $ 0.17 $ 0.30 81.82%

To see the full Icarus Signal, please go to this link

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms