Shares in Commonwealth Bank of Australia (ASX: CBA) have skyrocketed in recent years and are now considered by many to be heavily overpriced. Even following five consecutive days in the red, the stock is still trading at $81.35, putting it on a projected P/E multiple of 15.2.
While I certainly don't think the bank's shares are a buy right now however, they may not necessarily be a sell either. Here are three reasons why.
1) While the broader market has dropped to just 5,509 points in the last few days, a number of financial services groups still believe the 6,000 level is attainable. It will take stocks like Commonwealth Bank, which have a have a heavy weighting in the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO), to help drive it there. In other words, the bank's shares could climb higher in the coming weeks or months.
2) Interest rates were kept on hold by the Reserve Bank and it looks likely to stay that way for some time. That means that lending activity should continue to strengthen which should boost the bank's earnings in the near-term.
3) Further on that point, with interest rates stuck at 2.5%, the bank's juicy 4.9% fully franked dividend yield is still very appealing. Grossed up, that's a yield of 7%.
A better bet than Commonwealth Bank
Commonwealth Bank's shares could definitely continue to climb in the near future, and shareholders who sell today could miss out on those gains. In saying that though, I also believe there are better alternatives presenting themselves which could offer far greater returns in the long run.
