Sell Australia's Westpac Banking on China worries and valuation

04/16/2013 3:14 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

I’m going to take advantage of today’s bounce (or whatever) to recommend selling shares of Westpac Banking (WBK in New York or WBC.AU in Sydney.) More specifically, I’m going to recommend selling the shares of this Australian bank out of capital gains oriented portfolios such as my Jubak’s Picks portfolio http://jubakpicks.com/ . I’d keep the shares, however, in income oriented portfolios such as my Dividend Income portfolio http://jubakpicks.com/ for a while longer on the 5.31% yield

I think the yield is attractive and safe. I just don’t see much upside for the share price. Especially with the market seeing the rebirth of fears about slowing economic growth in China. When China catches a cold these days, Australia sneezes.

The problem, basically, is that Westpac Banking has run so far ahead of its banking peers that the shares are susceptible to stagnating or even retreating here. The stock has traded at a 2% premium to its peers on average over the last four years, Credit Suisse calculates, but it now trades at a 6% premium. With the bank near the end of its cost restructuring, I think that opportunity for bottom line growth is mostly already in the share price. The bank continues to emphasize growing its share of deposits in the Australian market—that would be a more attractive story to me right now if the Reserve Bank of Australia hadn’t cut its benchmark interest rate to 3% and signaled at its April 2 meeting that it saw room for further interest rate cuts. At the moment, then, raising capital from deposits is a relatively expensive source of funds.

My target price on these New-York-trade ADRs (American Depositary Receipts) was $146. That was left in the dust long ago: The ADRs traded at $164.65 at 2:45 p.m. New York time today. The position in the Jubak’s Picks portfolio is up 48% since I initiated it on November 10, 2010.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did own positions in Westpac Banking as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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