Why CBA is one of the most hated stocks on the ASX right now

There isn't a single analyst out there that reckons Commonwealth Bank (ASX: CBA) is a buy – But the stock continues to tick higher, up 5.5 % in the past month and 16.5% year-to-date.

There are currently nine analysts that rate the stock as a "Sell" and zero buys, according to Market Index's Broker Consensus page. The average target price among these brokers sits at $92.07 or 30% below current prices.

While the analysts have been wrong for a very long time, you can't fault them. There is no quantitative way to justify where CBA is currently trading.

Overvalued, overbought

There are plenty of metrics to demonstrate why CBA is absurdly overvalued.

Melbourne fund manager L1 Capital said in its June report to clients that "CBA currently trades at the most expensive valuation in its history, despite offering no earnings growth for the next two years."

'It also stands out as an outlier relative to the other major Australian banks, trading at a ~60% premium to peers on an earnings multiple basis compared to its long-term average premium of only ~17%."

"In our view, this performance is not supported by fundamentals, rather it indicates a level of crowding and over-valuation."

CBA is currently trading at a price-to-book ratio of 3.04. In other words, the company's market cap is trading at more than three times the value of its balance sheet. Since 2004, CBA has traded at an average price-to-book ratio of around 2.3 so it's a massive premium relative to historical standards.

The stock is also trading at a price-to-earnings ratio of 23.5. While this might be fairly ordinary for a growth or tech stock, you will almost never see CBA trade at such an expensive valuation. Since 2004, CBA has traded at an average price-to-earnings of 15.1.

Both ratios are more than two standard deviations above the mean.

Where to from here?

You can pull up any analyst research from the past 12-24 months and they've all said the same thing: The stock is too expensive and it's a sell.

In November 2023, Macquarie analysts said "with limited scope to grow earnings, risk around deposit repricing and lower retail banking returns, its ~18x FY24e price-to-earnings multiple is difficult to justify."

Post February 2023 reporting season, Citi said "Asset quality was strong in this result, but there is likely to be a perception that it will deteriorate from here as revenue tailwinds are starting to ease. We have a Sell on CBA."

So here's a different approach – How does CBA historically perform after reaching such extreme financial ratios?

I examined CBA's forward returns for when it trades above a price-to-earnings of 17.5 (one standard deviation). Only the first instance in each month where the PE ratio exceeds 17.5 is counted. Most of the data takes place around 2007, 2010, 2019 and 2021-23.

CBA forward returns for when PE ratio exceeds 17.5 (2004 to date) | Source: Market Index

In short, returns are negative a slight majority of the time and only begin to improve over the two-year mark. This implies a bit of time is needed for the earnings to catch up to the price.

I also examined CBA's forward returns when it trades at a price-to-book ratio above 3.0, counting only the first instance in each month. The data set returned a relatively sample size (22 instances), all of which occurred during 2006, 2007, 2008 and 2015.

CBA forward returns for when P/B ratio exceeds 3.0 (2004 to date) | Source: Market Index

Historical data provides no precedent for further upside in CBA at current valuations. But maybe the share price is trying to tell us something else – that the economy will see better days ahead.

Or maybe, we just say "the trend is your friend" and the stock keeps ticking higher.