Although the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has taken a bit of a hit over the past couple of trading sessions, the benchmark index has still managed to post some pretty decent gains over the past 12 months.
Most of the index's big name hitters have enjoyed particularly strong support, with the notable exceptions of Telstra Corporation Ltd (ASX: TLS) and Brambles Limited (ASX: BXB).
Despite their good performances recently, I think investors should think twice before buying these three shares at their current valuations:
Woolworths Limited (ASX: WOW)
The Woolworths share price has climbed around 30% from its 52-week lows, despite delivering a big decline in first-half profitability and dividends. The market is clearly banking on the success of its turnaround strategy, although this may be overly optimistic considering the increasingly competitive environment in the supermarket and retail sector. Woolworths is a good company, but with the shares currently trading on 21x earnings and a yield of just 3%, I think there are more attractive opportunities elsewhere.
BHP Billiton Limited (ASX: BHP)
BHP is one of the best mining companies on the ASX, but that doesn't mean it is immune to falling commodity prices. Unfortunately, the iron ore market is beginning to show weakness again and the crude oil price is seemingly being capped by the prospect of U.S. shale oil production. This doesn't bode well for the medium-term outlook for BHP and I think investors should take the recent share price strength as an opportunity to take profits. They could then look to buy companies with more sustainable earnings growth.
Commonwealth Bank of Australia (ASX: CBA)
Some investors view the banks as very safe investments but the reality is that they are highly leveraged and cyclical businesses. Importantly, there are mounting risks associated with the Australian property market and I think investors who are buying bank shares today are forgoing a reasonable margin of safety in favour of relatively stable dividend payments. As a result, I would be wary of buying Commonwealth Bank shares at the current price, especially since they are trading on a historically expensive earnings multiple of more than 15x.
