Ok, I am going to admit upfront that I have not had Commonwealth Bank of Australia [ASX:CBA] in my portfolio for a while now. Why? Because it went into a pretty severe correction a few months ago.
Is it at a cyclical bottom yet? I am not entirely convinced. The recent correction and upturn has re-established some confidence, but CBA simply hasn’t qualified itself as a very strong stock in terms of capital gain yet.
If I was to run a long position on the CBA stock, I would have had a long position since six weeks ago.
That would have given me a 6.3% return. That is what my model has been telling me.
What to do with CBA shares?
I have a fairly ‘tight’ tolerance for risk when it comes to CBA. This is partly due to the incredible fall during the Global Financial Crisis.
Having enough capital set aside to deal with a credit crunch is perhaps the appropriate stress-test for the bank, but what stock investors need to be concerned about is the volatility of the stock price.
There are many reasons to include CBA in your portfolio, and if you do, make sure you have plenty of reserve capital in place to deal with any erosion.
Although the immediate signal for CBA is buy, we still need more time to see if it has established a cyclical bottom.
Emerging Market Analyst, New Frontier Investor