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Should you sell your Medibank Private Ltd shares?

At $2.32 per share, retail investors who took part in the Medibank Private Ltd (ASX: MPL) IPO would today be sitting on a whopping paper gain of 16%, since the stock went public just one month ago.

Talk about easy money…

However, at $2.32, Medibank’s valuation is eye-watering. Many astute analysts have placed fair value of Medibank shares around $2.08. Which means the current price has no margin of safety. If your investing for anything less than the long term (five or more years), that’s not great news.

Indeed Medibank shares currently trade on a forward P/E ratio of 24. This compares with the smaller and more profitable NIB Holdings Limited (ASX: NHF) which trades on a P/E ratio of 18.9 and forecast 3.5% fully franked dividend.

In 2015, Medibank will pay just 4.9 cents per share as a dividend. That’s a cash return equivalent to just 2.1%.

Of course, based on 2016 forecasts, its yield jumps to 3.5%.

Still it’s hardly impressive. Especially when we consider the share prices of companies with lofty valuations are more susceptible to sell offs at the first sign of weakness.

Now, if you think I’m being a little hard on Medibank. See my disclosure below, I own shares.

And for what it’s worth, I hope its current valuation holds up (and goes higher!), but with the market – aka the S&P/ASX 200 (ASX: XJO) (INDEX: ^AXJO) – trading on a P/E slightly below 14, a return to the mean won’t be pretty for Medibank.

Foolish takeaway

When one of our stocks goes meaningfully higher, it can be easy to fall in the love with it.

At its current valuation, Medibank is not a sound investment. And unless you intend to hold your shares for the long term (five years or more), I think now could be the right time to walk away from the table, at least in part. I’m certainly considering it.

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Motley Fool Contributor Owen Raszkiewicz owns shares of Medibank Private and NIB Holdings. You can follow Owen on Twitter @ASXinvest.

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