The higher the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) climbs, the more investors should scrutinise the valuation of the stocks they want to buy and those they already own.
In recent years, Australia's S&P/ASX 200 might not have produced gains quite as spectacular as those of its international counterparts, like the NYSE.
However, even at today's prices, the market trades on an average price-earnings ratio of 16.3 – above its long-term average.
This can be put down to a lack of earnings growth.
Three companies which have reported lacklustre results recently, yet have seen their share prices jump higher in the past six months, are Medibank Private Ltd (ASX: MPL), Coca-Cola Amatil Ltd (ASX: CCL) and National Australia Bank Ltd (ASX: NAB).
As a result of their growth, not all are in the buy zone.
For example Medibank Private's current market price of $2.45 per share places it well out of the buy zone. Despite recently announcing it had grown half year net profit by 10.8%, Medibank is a hold at best given its valuation. However, if management cannot deliver on their cost cutting targets, its share price may be sold off.
NAB shares have also rallied in recent months, climbing as much as 13% in 2015 alone. However, like Medibank, investors are placing a lot of faith in NAB's new management team. At today's market price, investors must firmly believe fresh faced CEO Andrew Thorburn will return the company to earnings per share growth in 2015, after huge write-offs crippled profits last financial year. Despite its big dividend yield, in my opinion, the risk-return trade-off at these prices means it's somewhere in between a hold and a sell.
Finally, after a disastrous run in 2013 and 2014, shares of Coca-Cola Amatil look to have found their footing. Indeed so far this year, they have risen 11% on the back of a strong annual report released in February. However, despite its recent rise, the company's valuation does not appear demanding.
