Dougal Maple-Brown's shocking prediction: CBA stock will halve

In the gap between Maple-Brown Abbott Head of Australian Value Equities Dougal Maple-Brown agreeing to deliver a shocking prediction at Livewire Live about a month ago and his presentation on Tuesday, one half of it had already hit.

"My shocking prediction is that CSL will double off its lows, and CBA will halve off its highs," Maple-Brown said.

"To double off $90 at 10x, you can do it lots of ways. The simplest, and what's largely happened, is earnings have been flat but the multiple has doubled. CSL I think almost went through $180 this morning.

"As the stock has been re-rated from about 10 times earnings to about 20 times earnings, maybe that doesn't count as shocking, but the next one does."

The reason that CSL surged so quickly is that the former powerhouse had simply gotten too cheap and even a fairly flat result in August was enough to push the price higher. Or, in Maple-Brown's words: "Valuations always matter."

CBA is heading to $100

CBA (ASX: CBA) is about as entrenched in Australian investors’ portfolios as a stock can get, but should it still be? Long the poster child for “priced for perfection”, CBA has traded effectively +/-10% in the last 12 months, despite the wall of worries spanning its high price-to-earnings multiples (currently mid 20x).

These valuation concerns are driving a broker consensus that CBA is overpriced, however few are quite as low on the future outlook for Australia’s largest bank as Maple-Brown.

"My shocking prediction is that CBA goes from, in round numbers, $200 a share down to $100 a share. Why I say that call is still very live today is it's about $160 a share, give or take," Maple-Brown said.

The reason? Once again, it's all about valuation. 

"CBA was trading on around 30 times forward earnings. The most expensive bank in the world - daylight was second, third, fourth, and fifth."

The other big four banks, however, are trading around 15 times earnings. Essentially, all CBA needs to do is trade like its peers and Maple-Brown's prediction will be right. Also playing into the prediction is that the fund is underweight banks across the board.

"We are heavily underweight for banks, and we have zero CBA. Credit growth is slowing, costs are rising, credit losses are likely to rise depending on how good your crystal ball is with property prices. All of which means earnings are going to be flat at best. 

"If you've got a big bearish housing scenario, a big bearish recession scenario, earnings are going to go backwards. So, CBA's share price could halve whether the ratio halves or maybe only goes to 16 or 17 times, but the earnings go back a little bit. I don't find any of those things particularly shocking."

While only one of the calls still falls in the "shocking prediction" camp, the thesis on valuation being proved right so quickly for CSL backs up Maple-Brown's overall point.

"All we care about is valuation, that's how we build our portfolios. We are totally agnostic to AI, to data centres, to picks and shovels, whatever the thematic of the day is. All we care about is valuation. 

"We are overweight healthcare today for the first time in decades. We are more underweight Australian banks today than any time in the 40 years of our existence, because valuation matters."