Weekend Wrap: CBA's forward returns, Retail stocks are back and No more emissions targets

Hi there! This article is an excerpt from our weekend newsletter – which talks all things markets plus some interesting data insights and memes

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1. Commonwealth Bank’s Forward Returns

Source: Shutterstock

Everyone’s talking about how expensive Commonwealth Bank is right now.

Market Index’s Broker Consensus page shows eight ‘Sell’ ratings and zero ‘Buys’ with an average target price of $92.07 or 30% downside from current prices.

One of my favourite views comes from Melbourne fund manager L1 Capital: "CBA currently trades at the most expensive valuation in its history, despite offering no earnings growth for the next two years."

Earlier this week, I had a look at what CBA’s forward returns are like when it trades above a price-to-earnings ratio of 17.5 (one st-dev above the mean) and a price-to-book above three.

Interestingly, both data points tell a dramatically different story.

CBA forward returns for when PE ratio exceeds 17.5 (2004 to date) Only the first instance in each month when the PE ratio exceeds 17.5 is counted | Source: Market Index

CBA forward returns for when P/B ratio exceeds 3.0 (2004 to date) Only the first instance in each month when the PB ratio exceeds 3 is counted| Source: Market Index

CBA traded above a PE ratio of 17.5 mostly around 2007, 2010, 2019 and 2021-23. Whereas the PB above three instances occurred during 2006-08 and 2015. The forward PE returns suggest deteriorating near-term returns, which only begin to tick positive at the two year mark. Whereas the forward PB returns suggest a rather sharp downturn over the 12-24 month mark.

2. Poll of the Week

Commonwealth Bank shares closed at $130 on Friday. Will the stock be higher or lower by year end?

• Higher

• Lower

Vote here

3. Is Retail Back?

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Three low-key retailers – Accent Group, Michael Hill and Universal Store – punched out some above-consensus numbers this week and rallied. Here are the key numbers and how they performed on the day of the announcement.

• Accent Group (+10.2%) – 2H24 like-for-like (LFL) sales up 4.1% year-on-year and full-year LFL sales up 1.7% compared to Citi expectations of 1.0% and -4.4% respectively. FY24 EBIT to be between $123-125 million, down around 10% year-on-year but above consensus $117.8 million

• Michael Hill (+9.4%) – FY24 BIT between $14-16 million vs. $14 million consensus. Group sales up 3.8% year-on-year and in the last seven weeks of FY24, group sales up 6%

• Universal Store (+5.3%) – Group sales to be $288.5 million, up 9.7% year-on-year and EBIT to be in the range of $46-47 million, up 15% year-on-year. Macquarie was expecting FY24 EBIT of $44.2 million, so a slight beat

From a price action perspective:

• All three stocks provided some intraday upside (opened high, finished even higher)

• Accent Group (reported on Thursday) received a number of broker upgrades the following day (e.g. UBS retained Neutral; raised target price from $2.05 to $2.20)

• Broker optimism helped Accent Group finish 2.8% higher on Friday (vs. XJO -0.8%)

Retail was one of the best performing sectors during February reporting season, with names like Nick Scali and JB Hi-Fi running as much as 15-30% post earnings.

While Accent (shoes), Michael Hill (jewellery) and Universal (youth attire) might not provide the most holistic read-through for the retail sector – It’s certainly an encouraging start.

4. Yields and Real Estate

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When the US reported a cooler-than-expected inflation print last Thursday – which drove a sharp downward move for bond yields – I kept thinking about this line from an old Morgan Stanley report:

“Charter Hall is by far the most linked to bond yields. Its P/E multiple has a -0.77 correlation vs. Australian 10 year bond yields, and -0.68 vs. US 10 year Treasury yields … This means that as bond yields decline, the multiples of these two stocks generally re-rate upwards."

Charter Hall was one of the best performing REIT stocks in the past week or so and using the cooler-than-expected CPI print as a buy signal would have worked out relatively well.

Here’s how Charter Hall performed post-CPI:

• Friday, 12th July open – Up 3.3% to $11.94

• Friday, 12th July session high – Up 8.1% to $12.50

• Friday 12th, July close – Up 5.2% to $12.15

It opened relatively flat on Monday but rallied intraday to a 4.8% gain.

It’s pulled back over the course of the week but still 7.5% higher post-CPI.

So next time you see a big downward move in bond yields, remember Charter Hall.

5. In the Wire – No More Emissions Targets

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Welcome to a new section of the Weekend Newsletter – Each week, I’ll handpick the most intriguing and insightful content from our sister site, Livewire.

If there’s one Livewire contributor that stirs things up – It’s Chris Leithner. This week, he took a stab at Australia’s emissions targets, in summary:

• Australia’s emissions targets for 2030 and 2050 are unachievable, unaffordable and pointless – as they will not significantly affect global emissions

• Greenhouse gas emissions have risen exponentially since 1850, with growth slowing in recent years. However, this slowdown is more so from economic factors and efficiency gains, rather than climate action policies

• Australia’s emissions have fallen since 2011, but largely due to accounting tricks, COVID-19 impacts and offshoring of manufacturing

• Public opinion will eventually turn against ambitious climate targets due to high costs and minimal benefits

The article was published on Tuesday, 16 July and the next day ... Fortescue put its green hydrogen targets on hold (and cut 700 jobs).

More from Livewire:

• 30-year property veteran: Australia has its head in the sand on housing

• Meet Rod: The technical trader who learnt to wire his brain for success

• Australian shares at new record highs - is it sustainable?

• Top performing funds: The Aussie equities manager that delivered 38.45% in FY24

6. Cathie’s Got No Idea

Source: Twitter

In the above deleted Tweet – Cathie Wood attempted to soften her fund’s abysmal performance with a glass half full statement. Cathie Wood’s ARK Invest has destroyed an estimated US$14.3 billion in wealth over the past decade, according to Morningstar.

The flagship ARK Innovation ETF is down 70% from February 2021 highs. In the past 12 months, it's down 6.5% and down 4% in the past five years. In the above Tweet, Cathie is effectively saying ‘we lost so much of your money, we'll literally never pay taxes again.’

7. Meme of the Week

I'm sure we all go through periods where we feel like the only person that's making money is our broker.