Despite a shaky start to the year, the Australian share market has been firing on all cylinders more recently and is even threatening to set a new multi-year high. With the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) currently sitting at 5,632 points, it's less than 1% below its six-and-a-half-year high of 5,679, which it recorded in August last year.
As exciting as it can be to watch the share market smash records, investors need to be wary of the price they are paying for their investments. The fact is, some of Australia's biggest and most widely-held stocks have become heavily overpriced, and should be avoided by investors seeking market-beating returns.
With that in mind, here are three stocks I'll be avoiding this February…
1. Commonwealth Bank of Australia (ASX: CBA)
Australia's largest bank has delivered investors some amazing profits in recent years, both in capital gains and dividends. But investors have pushed the stock beyond a reasonable price, making it a very expensive investment today.
Not only is the stock trading near its all-time high of $90 per share, it's also one of the most expensive bank stocks in the world with a trailing Price-Earnings ratio of 17x and a Price-Book multiple of 2.98x. While rising bad debts and tougher competition could hinder profit growth, tougher regulations could also impact dividend growth which could see investors swarm for the exits.
While the stock could climb higher in the near-term should interest rates be cut further, it's by no means a long-term bet at today's hefty premium.
2. Medibank Private Ltd (ASX: MPL)
The float of Australia's largest health insurance business rocked the financial world last year. More than 750,000 Australians expressed their interest in the stock in what was the most highly anticipated float since Telstra Corporation Ltd (ASX: TLS), with those lucky enough to get their hands on a parcel of shares recognising a 7% profit on the first day of trading.
While there is no doubting the quality of the business, it's current asking price ($2.40) seems an unreasonable amount. In order to justify its worth, the company will need to show a significant reduction in costs and an improvement in operating efficiency when it reports its first-half earnings later this month.
Although the stock could be a strong performer in the long term, there are far better opportunities that could handily outperform Medibank from its current price.
3. BHP Billiton Limited (ASX: BHP)
Unlike Commonwealth Bank and Medibank, BHP Billiton is not overvalued. In fact, far from it.
Since August last year, the stock has been hammered as a result of the commodities crisis. With iron ore and oil prices both crashing to multi-year lows, BHP Billiton's shares have retreated an alarming 25% to just $29.70 per unit. While they are tipped to pay roughly $1.55 per share in dividends this financial year, the stock offers a remarkable 5.2% dividend yield, fully franked.
As tempting as it may be to pick up a parcel of shares at their current level, investors ought to wait a while longer before taking a risk on the 'Big Australian'. Despite its already discounted price, commodity prices are expected to fall further over the course of 2015, which could see more heartbreak for BHP Billiton shareholders over the coming months.