19-June-2022: CBA is Australia's second largest company (behind BHP) and is currently rated #283 here on Strawman.com (as I type this), having moved up the rankings a fair bit since their share price has reduced lately. It does say something about our primary focus here that a company like CBA rates so low in terms of people here who hold the company in their Strawman.com portfolio.
CBA is currently held here by only 4 Strawman Premium members. And I am not one of them. I have never held any of the big 4 banks in my SM portfolio.
Being the clear leader of the big 4 in terms of size and quality (and management also IMO), CBA is starting to look interesting from a price perspective:
$87.26 looks like a great price when you look at that, however when you zoom out and look at the 5-year chart...
...the pullback in 2022 hasn't been nearly so deep as the one in 2020, and I feel there is plenty of scope for that SP decline to continue further before they recover, purely based on sentiment around an impending Australian recession, and the rest of it. I think CBA is probably a decent BUY here, with a 5-year-plus view, but I think they're going lower and we'll be able to buy them even cheaper in the future, possibly the near future.
I found it interesting what FMG founder and major shareholder Andrew "Twiggy" Forrest said last week about the likelihood of a global recession this year - Andrew Forrest says no recession, but expects years of choppy markets (afr.com)
by Hans van Leeuwen, Europe correspondent
Last updated Jun 17, 2022 – 11.26am, first published at 10.36am
London: Fortescue Metals Group boss Andrew Forrest says there is “not a snowflake’s chance in hell” of a global recession this year, but warned that markets could be “choppy and uncertain” for up to three years.
Speaking to AFR Weekend during a visit to London, Australia’s richest man said Fortescue’s low cost base and its green energy plans left it well-placed to weather the storm of rising borrowing costs, soaring inflation and slower growth.
Andrew Forrest visited France this week to sign a deal for zero-emission trucks with manufacturer Liebherr.
He also shrugged off reports that China might create a centralised purchasing cartel to drive down iron ore prices, saying this was “a story which gets trotted out every three years”.
The Russia-Ukraine war has spurred sharp increases in energy and food prices. This has combined with rebounding post-pandemic labour markets and issues with supply chains and transport costs to fuel inflation.
“I don’t know of a better industry to be pivoting towards when fuel prices are going through the roof than an industry where you can make all your own fuel,” he said, referring to Fortescue’s ambitious plans to make hydrogen from renewable energy.
The prospect of rampant inflation has pushed central banks to start aggressively raising interest rates, sapping stock prices. Companies’ cost of capital may climb, deterring them from investing and expanding.
But Dr Forrest said Fortescue was relatively immune to these cyclical forces: it should still be able to raise capital, and could withstand any downturn in commodity prices.
“We smoke $3.5 billion worth of fossil fuel into the atmosphere every year. That is one hell of a pool of capital annually to invest into your own fuel production and green iron systems,” he said.
He also said there was still an abundance of capital looking for investible projects. “The largest part of that is for green projects, by a country mile. That’s not going to change.”
And even if the cost of capital rose or fell, “so does the commodity price”, giving him the revenue base he needs to push forward with his green transformation.
Fortescue plans to spend $800 million-plus to build an end-to-end supply chain for hydrogen and ammonia produced using only renewable energy, and is also investing in technology for hydrogen-powered or zero-emission ships, trucks and trains.
The biggest risk to Dr Forrest’s ambition would appear to be a drop in the price of iron ore, but he is not overly worried.
“Demand for our product has remained strong,” he said. “And if global demand for iron ore goes down, the last man standing will be the lowest cost producer. And that is Fortescue.”
‘Not a snowflake’s chance in hell’
Dr Forrest was not anticipating the kind of global recession that might sap demand for iron ore. He said there was “not a snowflake’s chance in hell” of that happening.
“From country to country, yes. But there’s pent-up demand from COVID and that’s now been exacerbated by the Russian invasion. And I think that demand is still going to be there,” he said.
“You are going to have a choppy two or three years; not recession, nothing hugely dramatic like a global recession. But markets are going to remain choppy and uncertain for two or three years.”
The other great uncertainty is geopolitical: the ever-lingering prospect of worsening relations between the US and China, with the potential for economic decoupling that might sweep up Australia even further.
Dr Forrest welcomed the Albanese government’s more temperate approach to relations with China as “a breath of fresh air”.
“I’ve really resented China being used in [Australian] politics,” he said.
He urged both Beijing and Canberra to “check their language” and make sure they were not creating an enmity by treating each other as enemies.
But his support for a détente with Beijing was based on “the public interest”, he said, as geopolitical tension was not a material concern for his business.
--- ends ---
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So back to CBA. There will likely be further downside from here, but at some point they will become worthy of serious consideration as part of a diversified portfolio, particularly one like mine that currently has zero banking exposure.
The sell-down of the banks (including CBA) is not entirely unjustified. They WERE quite expensive, especially CBA, and the outlook is changing, however they are NOT going broke, they are very well managed, and at some point I will likely buy some if the price keeps falling.
Also, while the banking landscape will continue to evolve, I would back CBA to keep themselves at the cutting edge of banking here in Australia, as they have done so far.
Source: AFR Banking Summit | Deloitte Australia
