Rudi’s View: Extreme Bifurcation Ahead Of August

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies.
For more info SHARE ANALYSIS: CBA
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

In this week's Weekly Insights:

-Ask FNArena
-Extreme Bifurcation Ahead Of August
–For Financial Advisors Ready to Make an Impact

By Rudi Filapek-Vandyck

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Tuesday, the 29th of July at 4.30pm.

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Extreme Bifurcation Ahead Of August

There was a time when 13.80% total return for the financial year would be welcomed by all and sundry as a pleasant outcome, but not so in mid-2025 when the strong rally in CommBank ((CBA)) shares has been responsible for 38% of those returns.

Prospects for CommBank and the broader bank sector in general have improved throughout the year, but only slightly so. As the share price rallied and kept on rising (up 22% in the June quarter alone) pushing the implied forward-looking dividend yield to a paltry 2.8%, many domestic shareholders have been selling their exposure.

The rise and rise of CommBank relative to the rest of the ASX200 (now weighing 12% of the index) has triggered lively debates among Australian investors, and still does.

Some investors have sold exposure and recycled the proceeds into other, cheaper-priced  major bank shares, but UBS for one doesn’t think this will prove the best protection against CBA’s coming back to earth – something that surely must happen at some point?

Whatever will pull back the CommBank share price is likely going to be a sector-wide impact, UBS suggested a few weeks ago. Meaning: it’ll impact the rest of the sector too, in all likelihood.

Indeed, share prices in financials broadly, and in banks specifically, have performed well in FY25 with three major banks ending up in the Top Five of highest contributions for the index since mid last year.

CommBank shares simply outclassed everyone and everything with a total return of… wait for it… 49.8%, adding more than three times more to index gains than number two, Westpac ((WBC)).

As to whom is responsible, the second half of last year featured steady buying orders from superannuation funds while in 2025 large US institutions seeking shelter from potential US tariff impacts have compensated for local sellers.

For more background, investors might revisit some of FNArena’s recent background stories and explanations:

https://fnarena.com/index.php/2025/07/18/in-brief-sks-technologies-banks-qpm-energy/

https://fnarena.com/index.php/2025/06/10/geopolitical-hedging-a-boon-for-commbank/

The Local FY25 Top Ten

It is likely more of Australia’s large cap bluechips with similar tariff agnostic characteristic might have enjoyed some of the unexpected international fund inflows as well.

The Top Ten of highest index contributors for the twelve months to June 30th is as follows:

1. CommBank
2. Westpac
3. Wesfarmers ((WES))
4. Telstra ((TLS))
5. National Australia Bank ((NAB))
6. Brambles ((BXB))
7. Macquarie Group ((MQG))
8. QBE Insurance ((QBE))
9. Aristocrat Leisure ((ALL))
10. Evolution Mining ((EVN))

Combined, these ten stocks represent 76.6% of all index returns in FY25.

Equally noteworthy: gold miner Evolution Mining shares needed to rally by 127.7% to make it into the Top Ten, just.

That list, and its importance for the local market, serves as a timely reminder for just how polarised the share market has been, and still is.

While large caps such as BHP Group ((BHP)), CSL ((CSL)) and Woodside Energy ((WDS)) have been prominent laggards throughout the year past, the market segment that has mostly disappointed investors is without any doubt the legion of small cap companies.

The (Ongoing) Small Cap Challenge

This market polarisation in favour of larger cap companies is not new and neither has it been ASX-specific.

A recent US markets update by Jason Zweig at the Wall Street Journal revealed the larger-cap S&P500 has returned on average 13.2% since 2014 while the Russell2000 index of smaller cap companies has lagged severely with an annual return of 7.2% only.

That is one mighty gap between the two opposing ends of the market in terms of company size.

For good measure: in Australia, the technology sector has mimicked its offshore peers by outperforming all other sectors locally, but despite large cap representatives such as Block ((XYZ)), Pro Medicus ((PME)), REA Group ((REA)), WiseTech Global ((WTC)) and Xero ((XRO)) its index relevance remains quite benign still.

Equally worth highlighting is that Australia’s sweet spot –the MidCap50– remains the best performing segment, including a total return of 16.45% in FY25.

Most of the pain/disappointment locally mimicks the US with the Small Ordinaries returning 12.26% in FY25, an annualised 10% for the past three years, on average 7.37% over five years and only 7.64% on average in total return for the decade past.

Australia being one of the world’s commodities centres, some of the small cap underperformance is likely related to the many explorers and developers in mining and energy, but that can only be a partial explanation, at best.

Also worth noting: the relative gap between banks and resources in Australia has blown out to a multi-year high (market weight of 35.2% versus 19.5%).

A deeper dive below the surface of today’s share prices and index level, into FNArena’s proprietary market data, confirms just how polarised the Australian share market is; possibly a lot more than most investors, including myself, realise.

Comparing share prices with price targets set by stockbroking analysts is far from a perfect guide –both can change instantly and dramatically– but for the general purpose of assessing today’s status for the ASX and painting a general picture, it can enlighten and explain a lot that otherwise remains hidden underneath biased opinions and outdated perceptions.

FNArena’s forward-looking data universe currently includes 531 ASX-listed companies, of which only 102 share prices are trading above their consensus target.  This number will be smaller post Monday’s general off day.

Ahead of results releases in August, we should be keeping in mind that forecasts will be updated in the weeks ahead, with potential positive impact on valuations and price targets.

If we raise the bar to share prices trading at least 5% above target, that number of elevated looking share prices shrinks to 70.

This is still a sufficiently large selection for investors to pay attention to, and it includes all the usual suspects, including the Top Ten mentioned, as well as Netwealth Group ((NWL)), Megaport ((MP1)), Eagers Automotive ((APE)), Harvey Norman ((HVN)), Origin Energy ((ORG)), and Charter Hall ((CHC)).

Of course, there are also plenty of small and micro cap stocks in this group, including Opthea ((OPT)), Arafura Rare Earths ((ARU)), Alcidion Group ((ALC)), HighCom ((HCL)), and Doctor Care Anywhere ((DOC)). I’m specifically not mentioning those under merger or take-over interest.

Not all of these elevated-looking share prices are doomed for immediate disaster, of course, but 531 stocks minus 102 still leaves us with nearly 80% (429 companies) that cannot be accused of trading on fumes and over-inflated market momentum, not until that implied profit disappointment comes out or analysts downgrade their target (usually in response to operational disappointment).

Obvious question: with such a heavily lopsided market set-up, is it still justified to worry about the index trading on a higher-than-usual valuation?

History suggests the answer is ‘yes’ as lower valued shares might not necessarily hold their ground if/when the popular winners sell off, but it does suggest there’s potential for outsized investment returns if positive earnings and/or market momentum spreads out to larger parts of the local bourse.

For good measure, sustained market momentum for ASX-listed companies splintered into polarised extremes during the global covid pandemic and has to date never recovered from it.

Calls for a decisive catch-up by smaller cap companies to their outperforming larger peers have been made ever so regularly over the past three-four years, both internationally and in Australia, but here we are mid-year 2025 and smaller cap underperformance and market polarisation remain as prominent as ever.

Maybe not getting carried away with too high expectations simply because share prices look under-priced and have lagged sustained market momentum to date might be the best approach at this stage?

The August results season is still expected to see the average earnings per share for the ASX200 retreat for a third successive year, to end up -18% below the peak of FY22.

This suggests there remains plenty of room for disappointments next month, even though forecasts are signalling better times might be ahead and some forecasters believe corporate Australia might –finally– enjoy an upgrade cycle throughout FY26/FY27.

One can but wonder if that is the prerequisite requirement to see momentum for the Australian share market broaden out significantly in the months/years upcoming.

Should we all send Christmas cards to Michele Bullock at the RBA and to federal Treasurer Jim Chalmers?

(Don’t think Trump cares much about what happens in Australia).

Digging Into The 80%

Below are some selective snippets from the 80% of share prices for whom trading at or above broker price targets has remained a bridge too far (a starting point for further research and assessment, maybe?).

In the category of absolute bottom-of-the-barrel, smashed-to-smithereens, seemingly crazily undervalued disappointments, we find the likes of:

-Hastings Technology Metals ((HAS))
-Bowen Coking Coal ((BCB))
-Australian Vanadium ((AVL))
-Cettire ((CTT))
-Playside Studios ((PLY))
-Step One Clothing ((STP))

Stocks trading with suggested upside potential between 50%-100%:

-Mitchell Services ((MSV))
-Macquarie Technology ((MAQ))
-DigiCo Infrastructure REIT ((DGT))
-Vault Minerals ((VAU))
-Bannerman Energy ((BMN))
-Viva Leisure ((VVA))
-PolyNovo ((PNV))
-Cosol ((COS))
-Austin Engineering ((ANG))
-Avita Medical ((AVH))

Stocks trading with suggested upside potential between 30%-50%:

-Regal Partners ((RPL))
-Elders ((ELD))
-Macmahon Holdings ((MAH))
-Worley ((WOR))
-Guzman y Gomez ((GYG))
-SiteMinder ((SDR))
-Southern Cross Electrical Engineering ((SXE))
-Lindsay Australia ((LAU))
-NextDC ((NXT))
-Telix Pharmaceuticals ((TLX))

Stocks trading with suggested upside potential between 10%-30%:

-Car Group ((CAR))
-Virgin Australia ((VGN))
-BlueScope Steel ((BSL))
-Collins Foods ((CKF))
-Paladin Energy ((PDN))
-WiseTech Global ((WTC))
-Seek ((SEK))
-AGL Energy ((AGL))
-Flight Centre ((FLT))
-GQG Partners ((GQG))

Stocks trading at less than -10% from their target:

-Woodside Energy ((WDS))
-Challenger ((CGF))
-Waypoint REIT ((WPR))
-Pinnacle Investment Management ((PNI))
-Iluka Resources ((ILU))
-Orica ((ORI))
-Woolworths Group ((WOW))
-EVT Ltd ((EVT))
-NRW Holdings ((NWH))
-Aristocrat Leisure ((ALL))

More than two decades of experience suggests this kind of information should not be interpreted in a static, set-in-stone manner.

A positive surprise in August can significantly widen upside potential, just as a negative development can work its magic to the downside.

A hefty discount might be the market telling us the risk level is too high and probably skewed to the downside, just as a big premium might signal upgrades are coming.

Post-Covid Is Different

The extreme polarisation in market momentum is equally reflected in stockbroker ratings for individual stocks.

Historically, a share market near an all-time high corresponds with more Neutral/Hold ratings and less Buys, but not in the post-covid era as clearly shown in the graphic below.

(The blue line represents the total Buy ratings).

Trading on a forward-multiple of 18.9x forecast earnings, the ASX200 is trading more than two standard deviations from its historical average of 14.7x.

Even if we limit today’s comparison to the past ten years (accepting that share price averages are higher in more recent times than they have been throughout the preceding decades) the current situation still compares unfavourably with an average multiple of 16.1x.

Possible explanations/justifications include better growth momentum ahead, also on the back of more rate cuts from the RBA, ongoing strong growth momentum for the AI megatrend, and a general broadening of AI benefits to broader sections of the economy (higher margins, more efficiency).

Many of these assumptions will be put to the test in August. Consensus forecasts are currently indicating EPS growth of circa 5% for the year ahead (FY26), followed by another near 8% in FY27.

Investors will be keeping their fingers crossed that outlook will not deteriorate in the same manner as it has done throughout all three years post FY22.

FNArena publishes a monthly update to the Australian Super Stock Report, which facilitates assessments such as the ones mentioned in today’s story. This report is included in paying subscriptions (6 and 12 months) and can be downloaded from the website.

As per tradition, FNArena will keep a close tab on corporate results in August.

For the coming two weeks or so, FNArena’s Results Monitor will still display its overview of results released post February: https://fnarena.com/index.php/reporting_season/

Next week’s edition of Weekly Insights shall dig deeper into expectations and forecasts ahead of August results for sectors and individual companies.

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Model Portfolios, Best Buys & Conviction Calls

This section appears from now on every Thursday morning in a separate update on the website. See Rudi’s Views for the archive going back to 2006 (not a typo).

FNArena Subscription

A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (21 since 2006); examples below.

(This story was written on Monday, 21st July 2025. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena’s see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: contact us via the direct messaging system on the website).

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