On Thursday, the Fairfax Press reported that analysts at leading investment bank Morgan Stanley believe the recent share price surge in mining giants BHP Billiton Limited (ASX: BHP), Fortescue Metals Group (ASX: FMG) and Rio Tinto Limited (ASX: RIO) is overdone, with the sector set to experience a period of underperformance in the medium term.

The bank notes that the attractive equity valuations, accelerated cost cuts and further reductions to capital expenditure which saw each of BHP, Fortescue and Rio gain 50%, 254% and 33% respectively since January 2016 is an inflection point. It expects further gains from here to be limited.

With this in mind, I thought it was worth revisiting BHP, Fortescue and Rio to see if you should sell your shares in these mining behemoths.

BHP

BHP is Morgan Stanley’s preferred exposure to the mining sector, with the bank saying mothballed projects (such as BHP’s Olympic Dam) could be revisited amidst the global rebound in commodity prices. I tend to agree with this sentiment given 2016 appears to be a transition year for BHP following its horrific 2015.

BHP’s divestment of non-core assets through the demerger of South32 Ltd (ASX: S32) last year should see the world’s largest miner regain focus on productivity gains in its four diverse commodities – coal, copper, iron ore, and oil.

This should augur well for profitability in the long run with the short-term risk being further remediation costs associated with its Samarco JV. Accordingly, at $21.28 its shares are best observed from far for now.

Fortescue

Fortescue added another 5.5% on Thursday to close at multi-year highs of $5.16. The world’s fourth largest iron ore producer has skyrocketed from its post-GFC low of $1.44 set earlier this year as a rebound in iron ore prices, ferocious cost cutting and accelerated debt reduction program spells wonders for its balance sheet and free cash flows.

With production costs and debt set to go lower still, Fortescue should manage to eke out increased profits if prevailing iron ore prices are maintained.

However, therein lies the problem given its reliance on China, the world’s largest importer of iron ore. Therefore, buying Fortescue today is not without its risks.

Rio

Rio Tinto is the world’s lowest cost iron ore producer, boasting the best iron ore business in the world. Whilst it also includes other commodities like aluminium, copper and diamonds as part of its world class portfolio of assets, the truth is that like Fortescue, Rio is heavily reliant on its iron ore division.

As Morgan Stanley notes, a return of heightened uncertainty around Chinese demand, especially in the construction and automotive sector – two key industries for steel demand — means the demand side equation for Rio’s main business remains uncertain.

Accordingly, at Thursday’s closing price of $49.20, Rio shares appear fully priced.

Foolish takeaway

Although mining stocks have had a stellar run in 2016 so far, the lack of pricing power and capital expenditure burden means efficiency gains will be few and far between from here on out. This means company profits will be driven by market demand in commodity prices, leaving investment in the industry littered with risk.

Accordingly, whilst I strongly believe that blue chip stocks like BHP, Fortescue and Rio should form part of a diversified portfolio, I view the current price of these miners as too high to justify fresh funds. Therefore, I would hold.

If you are interested in finding a quality stock to buy today, then I would recommend this top dividend share instead. A strong yield and potential share price gains make this a great investment idea in my opinion.

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Motley Fool contributor Rachit Dudhwala owns shares of Fortescue Metals Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.