How to play CBA earnings

Founder and Publisher of the Switzer Report
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Wednesday is CBA day, when the bank will have its latest bottom line show and tell, which is tipped to be over $4 billion, meaning something like an 8% rise in half-year earnings!

If this expected scenario does not play out, then bank stock prices will slide but if, as I expect, the bank follows the analysts’ script, then bank stocks will go up again.

The bank started the year at $77.80 and on Friday closed at $73.52 and it’s part of the reason I argued last week that if the market went up, say 10% or more, which I expect, then a 3% jump in the CBA is not too big an ask. Now let’s throw in the dividend of at least 5% and then, with grossing up, you’re getting close to 10%, which isn’t bad for a genuine blue chip stock.

The analysts think the interim dividend could be raised by 10% to $1.80 and even if the final dividend is held at last year’s $2, you’d pocket $3.80 on $73.52, which is a yield of 5.16%, before grossing up.

Bargain time

Today I saw an old mate, who has been a professional investor for wealthy Australians for over 40 years. I asked him how he was faring with the market more volatile and trying to correct? His answer was instructive for all trustees of SMSFs, who should be long-term investors.

This is what he said: “I like it when markets fall because it means I can buy companies I like and want to hold at much better prices.”

Sure, you have to read newsletters like this one to realise that once great companies, like David Jones, have a second-rate board, a poor management team and have failed to embrace an online strategy while ignoring the customer complaint for decades that “I can’t get any service at DJs.”

But other companies can be long-term holds, which you buy when prices fall. Need reminding? Well, just reflect on the GFC, when the CBA was under $30 and Macquarie was under $20!

I’m absolutely certain this year will see stocks head up and I hope I see 6,000 on the S&P/ASX 200 but I’ll be happy with Ron Bewley’s call of 5,850 or Shane Oliver’s 5,800. Hell, I’d be happy with 5,600!

I know this will be a volatile year – lots of ups and downs – and if this current near-correction turns around and we see another big spike up, which some US analysts are tipping, it will only set us up for a big correction some time later this year.

It could be a “sell in May and go away year” as US mid-term election years can be a handbrake on stock prices, but I’d be buying ahead of the November-December comeback for stocks.

A valuable lesson

Occasionally, I get some negative feedback, though seldom from subscribers to this newsletter. The last one came from my Switzer Daily website where this guy said that I was part of “a Wall Street cheer squad” and together we will do irreparable damage to investors, again!

Apparently he believed I was talking up stocks before Lehman Brothers took the market down again but all I could find was a column from the Wealth section in The Australian, that I wrote in September 2008, which seems at odds with his claims.

In the column, I argued that a big bounce in stocks was likely, but for the nervous, the 7.5% term deposit rates were hard to resist. I suggested not to lock-in for a year as I expected a stocks comeback within six months and it happened in March!

I even said the better play was maybe 50% at 7.5% and 50% in blue chip dividend payers. I was proud of that call!

So what’s my point, apart from patting myself on the back?

My critic seems to suggest that it is my job to call the market perfectly so investors never endure damage. He called it “irreparable damage” but when it comes to stocks, if you are in quality companies that pay dividends and you have at least 20, then it would only be a devastating depression that would deliver irreparable damage.

The goal for all SMSF trustees is to create a portfolio, which gives a cash flow annually to support a good lifestyle. If this is done, it means that you can ride the ups and downs of the stock market, which will happen.

It also should mean that you create that perfect retirement world that sees you buy CBA at $30 or Macquarie at $20 during a crisis, because you have a good stream of income that has been built up during the good times on the stock market, which tends to be seven out of 10 years.

I expect stocks to rise in 2014 but if they fall, I will be a buyer and I hope you join me.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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