1 popular ASX stock I’m steering clear of

Commonwealth Bank of Australia (ASX: CBA) is one of the most popular, large-cap shares on the ASX. However, bigger doesn’t automatically mean a better investment. Personally, I’m not attracted to the ASX bank stock for a few different reasons.

Yes, the business has performed very well for investors over the past three decades and is still paying a solid dividend yield.

But, I believe there’s more to consider about a potential investment than just the amount of passive income it can deliver. So here’s what makes me want to avoid CBA shares right now.

Competition limiting growth

I think the banking environment has changed significantly over the past decade due to the rise of digital banking and mortgage brokers.

These days, smaller banks and lenders don’t need large branches to provide customers with the service they’re after. This has enabled lenders like Macquarie Group Ltd (ASX: MQG) and ING to increase their market share significantly.

In addition, loans appear to have become commoditised, and prospective borrowers are increasingly using mortgage brokers to help them choose the best loan. Price is a key factor, so lender net interest margins (NIMs) are being challenged. In the quarterly update for the period ending 31 March 2024, CBA said its net interest income was 1% lower than the prior corresponding period, partly due to “continued competitive pressures.”

Just think how many lenders there are on the ASX – CBA, Macquarie, Westpac Banking Corp (ASX: WBC), ANZ Group Holdings Ltd (ASX: ANZ), National Australia Bank Ltd (ASX: NAB), Bank of Queensland Ltd (ASX: BOQ), Bendigo and Adelaide Bank Ltd (ASX: BEN), AMP Ltd (ASX: AMP) and Pepper Money Ltd (ASX: PPM). That’s a lot of competition all vying to win volume.

High CBA share price valuation

Every business has a valuation, and we can compare different ASX shares based on certain metrics, such as the price-to-earnings (P/E) ratio or the price-to-book ratio (which compares a company’s market capitalisation to its balance sheet).

Last month, broker UBS said CBA shares were trading at a FY25 price-to-book ratio of 2.7x and a forward P/E ratio of 23x. That puts it among the most expensive banks in the world. The CBA share price is close to 5% higher than it was a month ago, making it even more expensive again.

Using UBS’ estimates, the Westpac share price is valued at 14x FY25’s estimated earnings, the ANZ share price is valued at 12x FY25’s estimated earnings and NAB is valued at 16x FY25’s estimated earnings.

So it seems CBA stock is much more expensive than its peers. I also think there are plenty of other ASX shares, and even industries, where we can find better opportunities that can deliver stronger earnings growth for their valuation. And UBS thinks CBA’s earnings per share (EPS) of $5.72 in FY25 and $5.78 in FY26 are expected to be lower than FY24’s EPS of $5.79.

Furthermore, it’s much harder to grow a huge ASX stock from $200 billion to $300 billion than a smaller business from $1 billion to $2 billion. The bigger a business becomes, the fewer customers it has to reach.

So, while CBA is not a bad company by any stretch, I believe there are many smaller investments on the ASX that could deliver better outcomes for shareholders.

CBA share price snapshot

Since the start of 2024, CBA shares have risen by around 10%. That compares to a rise of just 3% for the S&P/ASX 200 Index (ASX: XJO).

The post 1 popular ASX stock I’m steering clear of appeared first on The Motley Fool Australia.

More reading

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• Unstoppable! CBA share price smashes yet another record high
• Why you should sell CBA, Westpac, and Bank of Queensland shares in June
• Are ASX 200 bank shares a good investment right now?
• How the CBA share price defied the bears to surge in May

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Macquarie Group. The Motley Fool Australia has positions in and has recommended Bendigo And Adelaide Bank and Macquarie Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.