The Difference Between the Commonwealth Bank and Energy Stocks

Commonwealth Bank of Australia

Yesterday I mentioned that if only the banking sector could hold its own, the ASX 200 had a good chance of moving higher in the coming weeks.

Almost immediately, up popped a headline that revealed the banking regulator, APRA, had launched an inquiry into the Commonwealth Bank [ASX:CBA]. As the Financial Review reported:

The prudential regulator will launch an independent prudential inquiry into Commonwealth Bank of Australia’s governance, culture and accountability, following the allegations raised by AUSTRAC that the bank failed to report suspicious transactions’.

An independent panel will be established to run the inquiry, APRA said in a statement on Monday morning, and will take six months to provide a report that will be made public’.

With this hanging over its head, it’s hard to get too excited about the prospects of Australia’s largest bank. At least in the short term. So there goes my theory…

As you can see in the chart below, CBA is now trading at its lowest point since November last year.

That could mean it’s a good buying opportunity. Often, when there is a lot of negativity around a stock or a sector, the bad news is absorbed into the price, making a stock good value.

Commonwealth Bank of Australia CBA (ASX) 29-08-17
Source: Optuma
[Click to open new window]

On a fully franked yield of around 5.6% (8% grossed up) you could argue that CBA is very good value.

But who’s to say this is the bottom for CBA?

Those who took a similar view after the May sell-off and thought they had picked the bottom in early June, are now under water. Sure, they looked astute for a while, as the share price rallied from $78 to $85.

But now it’s closing in on $76. While another bounce might be due, the fact that CBA easily broke below the recent low tells you there isn’t much support for the share price right now.

One of the investing rules I stick to in my Crisis & Opportunity newsletter is to never buy a stock when it is in a downtrend. Harsh experience has taught me that while you sometimes get it right, more often than not, trying to pick the bottom is a tough business. The odds just are not on your side.

You’re far better off waiting for the worst to be over before venturing back in.

So while CBA looks inviting with a grossed up yield of 8%, I’d happily watch how this plays out on the sidelines for now. After all, an 8% dividend takes a year to earn, while you can lose 8% in capital value inside a week.

Energy Sector Poised for Big Gains

It’s on this principle that the energy sector is such a compelling opportunity right now. Firstly, it’s unpopular. The general consensus is that the oil price is going nowhere. There is too much supply and demand is tepid.

The response to the hurricane that just hit Houston seems to support this view. The oil price fell on the news. In years gone by, oil has surged as production platforms in the Gulf of Mexico were taken off line.

But this time around, the hurricane hit oil refining infrastructure, rather than production infrastructure. These days, there is plenty of onshore US oil production, so the Gulf of Mexico isn’t as important as it once was.

Because of damage to the refining infrastructure, there is no way to process all the oil. Hence, demand for oil will momentarily decline.

Don’t let this cloud your judgement though. This sector is far from dead.

Have a look at the chart of the chart of the ASX 200 Energy index below. It shows the performance of the sector since 2010. The collective price of Aussie energy stocks peaked in 2011.

After a long bear market, prices bottomed in 2016. From peak to trough the sector lost more than 60% of its value.

S&P/ASX 200 Energy XEJ (ASX) 29-08-17
Source: Optuma
[Click to open new window]

In my view, the sector is now in the early stages of a new bull market. This may not be apparent immediately. After all, most bull markets start out with scepticism. Each sell-off is viewed as a return to the bear market.

There is a lot of scepticism around oil and energy right now. A 60% price decline will do that. It affects the markets investing psychology. That’s why it takes higher prices for investors to think energy stocks are ‘safe’ again.

That’s why, if you’re willing to go out on a limb and feel a tad uncomfortable without the safety of the herd, you can potentially make exceptional gains investing in this sector.

I currently have five energy stocks in the Crisis & Opportunity portfolio. Three of those featured in a recent report and are potential 10-baggers — stocks that could go up 10 times in value from here.

If you’re interested in learning more about why I think oil and energy markets are poised for big gains in the next 12 months, go here.


Greg Canavan,
Editor, Crisis & Opportunity

Greg Canavan

Greg Canavan

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Port Phillip Publishing.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

Greg Canavan

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