On March 13 its share price hit a 52-week low of $28.55. Within three weeks it was trading above $32.50, a solid gain of about 14 per cent. Investors were looking for secure havens for their money at tentative signs - indeed, very tentative signs - of a bull market, and the National was a beneficiary.

For years the National had that aura of invincibility about it. Its earnings record, its productivity, the quality of its assets (loans) and its overseas ventures, all added up to a bank that had a long-term strategy and knew how to implement it. Most brokers had it as a "buy". Institutional investors were overweight in the stock.

Then the HomeSide debacle in the US ended the notion that the National board and senior management could do no wrong. It was 1997 and the bank, under the leadership of Don Argus, acquired the mortgage service provider for $US1.2 billion ($A2 billion). The bank was pushing offshore and HomeSide seemed a logical acquisition.

But four years later, on the eve of the announcement of the 2001 full-year results, Mr Argus's successor, Frank Cicutto, had to come clean with a massive $US1.75 billion write-down on this investment. All in all, HomeSide was to cost the bank about $A4 billion. Suddenly the bank didn't look so invincible.

Since then the National has had its share of issues with the investment community. Its involvement with a weak British market is taking its toll on the bank. The broking firm Deutsche says: "The combination of further slowing in UK economic growth (a GDP growth of 2 per cent is forecast), modest growth in business credit, the need to reinvest into its UK platform and higher pension costs suggest National's underlying performance from its UK assets (Europe accounts for 21 per cent of group earnings) could be quite weak." The bank, however, has no intention of walking away from Britain, despite the failure of an "informal" bid for Abbey National last year.

Investors were also unimpressed by the profit to September 30, 2002, of $3.37 billion. That result, while guaranteeing talkback radio tirades about "greedy" banks, did nothing for shareholders who immediately took 5 per cent off its market capitalisation. It also added to the industry perception that the days of easy profits were over.

Deutsche is predicting a $4.3 billion result for 2003, which seems optimistic given the current state of the markets. But even a lesser number is unlikely to dim National's appeal to investors in any general market resurgence. For investors who believe the market is in recovery mode, National is a buy. Warts and all.

Recommendation: buy

About the company

Bulls

Qantas (QAN, $3.11) BUY
Paul Pekish, a senior private client adviser with Paterson Ord Minnett, says Qantas's share price reflects a temporary loss of bookings due to the war in Iraq and the SARS virus. "Any worsening of these issues could create further temporary profit downgrades, but Paterson believes these are only short-term issues," he says, adding that the airline would be a good buy for the medium to long term.

Corporate Express Australia (CXP, $4.17) OUTPERFORM
John McDonough, a financial consultant with Smith Barney, says Corporate Express has a unique business model, a fact that is not fairly reflected in its share price. "Factors such as its unassailable market position, sticky customers, recurring earnings, high returns, ungeared balance sheet and scope to sharply lift dividends all seem to be being ignored," he says, adding that recent problems in Sydney have been resolved and the company's profit should increase 22 per cent this year. He rates the company a medium-risk investment.
See disclosures about this company at www.smithbarney.com.au

Bears

Deutsche Diversified Trust (DDF, $1.23) SELL
Paul Pekish, a senior private client adviser with Paterson Ord Minnett, says that Deutsche Diversified is entering a period of uncertain earnings. "About 35 per cent of its portfolio leases expire in the next 18 months, with over half of these tenancies vacant, to be vacated, or mooted for redevelopment," he says, adding that the office and industrial leasing market in the eastern states is weakening, which may result in declining earnings per unit over the next few years.

IRESS Market Technology (IRE, $1.89) UNDERPERFORM
John McDonough, a financial consultant with Smith Barney, says IRESS faces a challenging couple of years. "In addition to continuation of difficult conditions for its client base, it faces the prospect of new competition that has the potential of significantly eroding earnings," he says, adding that Smith Barney does not expect to see a rebound in its stock price. He rates IRESS a high-risk investment.
See disclosures about this company at www.smithbarney.com.au

WILDCARD