Here’s 1 stock this fundie prefers over Commonwealth Bank (ASX:CBA) shares

The Allan Gray Investment Forum held in Brisbane on Wednesday gave an alternative to Commonwealth Bank of Australia (ASX: CBA) shares
The post Here’s 1 stock this fundie prefers over Commonwealth Bank (ASX:CBA) shares appeared first on The Motley Fool Australia. –

Commonwealth Bank of Australia (ASX: CBA) shares have gained plenty of attention lately, as the bank approaches the $100 mark. Big profits, translating into big dividends, ignited the recent run-up in bank shares. A rotation out of growth no doubt has also helped.

However, managing director and chief investment officer at Allan Gray, Simon Mawhinney, believes there are other opportunities out there for investors.

CBA shares fall outside sweet spot

In its first national investment forum for the year, Alan Gray kicked things off in Brisbane on Wednesday. Mawhinney shared the Allan Gray approach to investing of long-term, contrarian, and fundamental to a loaded room of eager attendees.

We kicked off our national Investment Forum in Brisbane today and it was great to see everyone in person again – next stop Melbourne.

If you missed today’s session you can still register to watch the Sydney Investment Forum livestream on 27 May.

— AllanGrayAus (@AllanGrayAus) May 19, 2021

Sticking to the Allan Gray values, Mawhinney suggested that the Commonwealth Bank is now sitting outside the fund’s ‘sweet spot’. Which is to say, the bank now trades at too high of a price-to-earnings (P/E) ratio for its liking.

For comparison, the rising Commonwealth Bank share price has seen its earnings multiple expand from 11.96 times nearly 10 years ago, to 25.91 times. The industry average is around 15.6 times.

Commenting on Australia’s biggest bank, Mawhinney said:

I believe its earnings and returns on equity are likely to mirror the average of the other banks and suspect that investors would be better off choosing another bank to invest in rather than CBA. But I am not advocating investing in the banks either. There are a lot of other opportunities available to investors.

A potential ASX challenger to Commonwealth Bank

If the banks are not looking favourable, then what are the alternatives? Well, Simon Mawhinney offered a potential contrarian opportunity in the form of Challenger Ltd (ASX: CGF).

The fund has been adding to its position in Challenger recently, with its weighting growing to nearly 2% as of 11 May 2021. Allan Gray added heavily following the annuities company’s third-quarter results, which was met with a 10% selloff.  

Mawhinney provided the following commentary on why Challenger looks attractive:

Its annuity distribution network is disrupted and rates it can afford to pay its annuitants has been negatively impacted by the low returns it is able to achieve from its investment portfolio. This is all true but viewed in isolation, is only one side of the coin.

The other side, the price you pay for Challenger, can’t be ignored. In my opinion, some if not a lot of these headwinds are factored into the current share price

Mawhinney doesn’t foresee an imminent reversal in the share price of the ASX’s biggest bank. Though, Challenger might have less upside currently priced in, compared to the Commonwealth Bank.

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More reading

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The ANZ (ASX:ANZ) share price leads the ASX 200 banks this week
Can the Commonwealth Bank (ASX:CBA) share price crack $100?
Aussies’ financial wellbeing at all-time high: CBA (ASX:CBA) report
ASX bank shares primed for dividend bonanza

The post Here’s 1 stock this fundie prefers over Commonwealth Bank (ASX:CBA) shares appeared first on The Motley Fool Australia.

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