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Stock trade idea: National Australia Bank

National Australia Bank Ltd (NAB) continues to underperform its peers. Over the past 12 months NAB has underperformed the other three big banks by 7.5%.

Stock
Source: Bloomberg

While its own surveys show a subdued outlook for business conditions, new CEO Andrew Thorburn is already looking develop more efficient practices in this key area of the bank’s lending to maximise revenues.

More importantly, he is clearing the decks for the sale or listing of milestone UK assets. This will address the biggest issue in NAB’s underperformance – capital concerns and Basel III requirements. Announcements will be made inside the next 12 months.
 

The key stats:

12-month forward PE estimates: 12.1x - which is 19% discount to CBA

Earnings estimates per share in FY15: $2.76

Dividend growth in 2015: 4.21% to $2.05

Net yield: 5.92%, gross Yield: 8.46% - the Australian 10-year bond is currently 2.56%

12-month high $36.00 – 12-month low $31.33
 

Potential trade:

NAB has trended sideways for the past year. There is strong support at $32 and strong resistance at $36.80. Currently NAB is sliding back towards its first support level at $33.05. We see a buying opportunity at or just below the first support level, with the optimum entry point at the midpoint of two support levels (ie. $32.52) – I would mitigate risk by putting a stop loss just below strong resistance (at $31.90).

We see NAB rallying on the quasi-bond trade in the coming weeks and, with the bank due to release a quarterly update on 5 February, any further signs it is cleaning the decks will likely see it testing the upper Bollinger bands at $34.77. A break above this point would bring the $35.40 resistance level into play – a level where I would look to take some profit.

National Australia Bank
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