A lot has happened in politics over the last 24 hours. Malcolm Turnbull's political future has come under scrutiny because of Australia's contracting GDP. Italian prime minster Mario Renzi officially resigned from Government following Italy's failed referendum. And to top it off, Time magazine named Donald Trump as person of the year.
Whilst global politics continues to provide musings for conjecture, financial markets have seemingly taken all these developments in their stride, hitting record highs overnight.
Nonetheless, I believe some stocks on the S&P/ASX 200 Index (ASX: XJO) are trading at stretched valuations and thus I recommend investors consider taking profits.
Commonwealth Bank of Australia (ASX: CBA), Medibank Private Ltd (ASX: MPL) and Fortescue Metals Group Limited (ASX: FMG) are three companies which I think you should sell today. Here's why.
Commonwealth Bank of Australia
Whilst I am aware that Commonwealth Bank is the gold standard of Australian banking, it's current share price implies a trailing price-earnings of slightly under 15x. Though this is normal for Commonwealth Bank – which typically trades at a premium to peers Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) – given the current low credit growth environment, I believe anything above $80 for this banking behemoth is a touch expensive.
Whist this recommendation doesn't mean I'm turning negative on Australia's banking sector, I do regard Commonwealth Bank's almost 15% rally since November as a good time to reposition portfolios for next year.
Medibank Private
Medibank Private shares have jumped 17% since September as investors are provided insight into its 2017 outlook. Given management has indicated that market growth is expected to slow, and revenue is slightly below expectations in the year so far, I don't expect Medibank to provide blockbuster earnings growth next year.
Accordingly, at a price-earnings of about 18x, I believe there are better opportunities to invest your dollars and thus believe shareholders should look to reduce holdings in Medibank at current prices.
Fortescue Metals Group
Following a stunning rally in the benchmark price of iron ore in recent weeks, shares in Fortescue are currently trading at post-GFC highs. This is despite the iron ore price being some 50% below its highs hit during Australia's mining boom.
Although today's Fortescue is a leaner beast than it was during the heady days of iron ore prices, I believe Fortescue's current price values the business too dearly. Whilst management has been active in reducing debt to de-risk the company's balance sheet, Fortescue's 350% plus gain this year has been driven primarily by optimism on the Chinese economy and a rapid uptick in the iron ore price.
Though both themes have played out well in the current year, I question how much more they can continue improving given the global backdrop. Thus, I think investors should consider taking advantage of Fortescue's elevated share price and take some profits off the table today.
Foolish takeaway
It is entirely possible that any one of Commonwealth Bank, Medibank Private and Fortescue could continue surging higher from current prices. However, smart investing involves taking profits when shares are at prices you wouldn't commit fresh funds to buy at – after all, you shouldn't keep holding a company if you wouldn't buy it at its current price!
Although all three companies remain sound businesses, I think they're trading at stretched valuations in the current climate and therefore recommend investors take profits and sell some of their holdings.
