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Here’s why investors should avoid Medibank Private Ltd

$2.43.

That’s the price tag on the shares of Medibank Private Ltd (ASX: MPL) right now, reflecting a massive 21.5% paper profit for those ‘mum and dad’ investors who bought into the IPO hype and have held on until now.

In fact, in the space of just over one month, the health insurer has increased more than 16 times the amount as the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) over the entire year. Since the beginning of 2014, the benchmark index has risen just 1.3%, not including dividends.

Indeed, it’s been a fantastic result for shareholders with the stock having proven many critics wrong – myself included. Although the shares are firing on all cylinders however, I’m still critical of the stock’s current price. While I thought $2.00 was a high premium to pay, I certainly wouldn’t entertain the idea of buying them now – at least not until they fell back in price considerably.

While Medibank is a high quality business, it needs to heavily reduce its costs and improve its margins to justify its high share price. In this low interest rate environment, I wouldn’t mind a higher dividend yield as well. Although Medibank could continue to climb higher, I believe there are a number of other stocks trading at more compelling prices right now which could deliver far greater gains over the coming years.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned. You can follow Ryan on Twitter @ASXvalueinvest.

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