Too many investors make the mistake of thinking that a high-quality company always makes for a great investment.
In reality, strength and market dominance only make up one side of the investing equation. The other side is, of course, whether you are paying the right price…
Buying stocks in a high quality corporation is completely useless if you're paying too much for them. As a perfect example, just look at QBE Insurance Group Ltd (ASX: QBE) when it was trading at around $35.50 in 2007 – investors who bought in then would have lost 70% of their investment by now…
Of course, a number of profit downgrades and a struggling US division have played a huge part in dragging the shares down since then, but investors were still paying far too much at that stage.
With that in mind, here are three blue-chip stocks I believe are currently overpriced, and that you shouldn't be buying today.
1) Woolworths Limited (ASX: WOW). There is no denying the quality of the leading supermarket retailer, which has delivered investors with incredible capital gains and dividends since its inception into the ASX in 1993. The problem is, the shares no longer appear to be reasonably priced – in fact they recently set a new all-time high at $38.92. Investors also need to consider the threats posed by Aldi and Costco, as well as Woolworths' ability to continue expanding considering its sheer size.
2) Commonwealth Bank of Australia (ASX: CBA). Like Woolworths, the bank is currently hovering near an all-time high at $82.67. While the bank has been benefiting from the low interest rate environment and low bad debts, its ability to continue growing earnings in the coming years, as well as its ability to maintain its dividends, have both come into question recently. While it would be difficult to find a higher quality corporation, I don't expect the bank will outperform the broader market over the coming years from its current valuation. The same could be said for each of Commonwealth Bank's major peers.
3) Fortescue Metals Group Limited (ASX: FMG). The iron ore miner isn't on this list because it's overpriced, but rather because of the risks involved with buying the stock. As a pure iron ore play, Fortescue is completely at the mercy of the commodity's price movements. While iron ore is currently priced at US$95.20 a tonne, it is widely believed it will fall towards US$80 a tonne in the coming months. Further, a lower iron ore price would also impact Fortescue's ability to repay its enormous debt load.
The Motley Fool's #1 dividend stock for 2014-15 – FREE!
One of the reasons why investors remain so attracted to the three companies mentioned above is their juicy fully franked dividend yields. While these three stocks don't present as buys in my opinion, the Motley Fool's top analysts have uncovered another ASX stock with strong growth prospects and a grossed up 7% dividend yield!
