Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Time to unwind 22.8% profit on bank shares
I like low-risk trade ideas. And even if I can’t trade (for example, because I don’t want to crystalise capital gains), it provides guidance as to where future purchases or any re-weighting decision might be directed.
On December 10, I wrote “buy NAB, sell Commonwealth Bank” (You can read the full report here).
That trade was low risk – because it maintained market exposure and sector exposure – it was just rebalancing between two very similar companies – overweight in one stock, underweight in another stock. In other words, CBA was expensive, and NAB was cheap. And low risk also due to the “mean reversion theory” (more on this later).
Profit of 22.8%!
As the table below shares, NAB shares have rallied from $24.50 to $35.98, while CBA has only moved from $60.88 to $74.17. CBA has paid an extra dividend (364 cents in total per share versus 93c for the NAB), and when this difference is added back in, the net change is 22.86%. So, if you had sold $10,000 of Commonwealth Bank shares and purchased $10,000 of NAB shares (a “low risk” trade), your portfolio would be better off by $2,280!
Interestingly, only one broker (Citi) has a “buy” on CBA. The other seven are either “sell”, “underperform” or “neutral”.
So much for broker ratings.
My sense is that CBA still deserves a premium rating, mainly due to its very clear technology leadership, proven management team, and leading positions in most of the major markets (deposits, home loans, wealth management). The question, as always, is how much?
With NAB in the lead up to its annual result and dividend payment (result announced Thursday 31 October, ex dividend on Thursday 7 November), it is more than likely to be well bid and might tighten even further against the CBA. Also, markets tend to overdo things, so it is hard to fight the trend if NAB is “in favour” and CBA is “out of favour”.
Bottom line – time to unwind the trade. Equal weightings between CBA and NAB, leaning to an overweight position in CBA, after NAB goes ex-dividend.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.