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These hot favourite ASX stocks are most at risk of a reporting season sell-off

Some of our best loved ASX stocks could lose some of their shine this month as they hand in their earnings report cards and provide their take on what lies ahead in this year.

One of the key points of focus for the market is whether the relatively high valuations on the market can be justified with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index hovering near a more than 10-year high.

Paying for expensive stocks (better known as “growth” stocks) has been a winning strategy over the past year or two as stocks trading at bargain valuations (or “value” stocks) have underperformed by a large gap.

But we are now at an inflection point as value stocks tend to overtake growth in a late stage bull market, and the reporting season could just provide a trigger for this rotation.

What this means is that hot favourites on a high price-earnings multiples (P/E) could be facing a sell-off this month. That might be hard to imagine but it wasn’t that many years ago when many thought our largest telco Telstra Corporation Ltd (ASX: TLS) could do no wrong as it surged to over $6 a share in 2015. It’s now a shadow of itself.

One stock that I think could be facing a de-rating is beloved blood plasma maker CSL Limited (ASX: CSL) as its share price surged 55% over the past year to $197.77.

I know it’s a controversial call as many brokers still love the stock but its trading on a FY19 consensus P/E of 46 times!

Sure, there is still good growth in the tank with analysts tipping around a 15% uplift in net profits for the current financial year over FY18, and the stock will benefit from the rising US dollar, but I don’t think that quite justifies the lofty P/E – which is the highest it’s been in at least five years, according to data from Reuters.

Another high-flyer at risk of a sell-down is share registry services group Computershare Limited (ASX: CPU) with the value of its shares rallying close to 30% over the year.

The group will also benefit from the exchange rate trend and buoyant global capital markets, but Credit Suisse points to market expectations as a key risk factor.

“With consensus above FY18E guidance and looking for +13% EPS growth in FY19E, we see a risk that CPU’s historically conservative guidance could come in below expectations, which despite strong execution on their strategy would weigh on the share price,” said the broker.

The third hot favourite that could rapidly cool is online property website operator REA Group Limited (ASX: REA). I’ve highlighted the risks to the stock earlier this week (click here for details) after noting its 25% jump over the past year and its 41 times P/E multiple, but I think the risks are building after today’s release of the Corelogic Hedonic Home Value Index, which showed an acceleration in the decline of house prices.

Consensus is expecting earnings growth of over 14% for REA Group in FY19 but the way the property market is going, I think expectations may need to be revised lower.

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Motley Fool contributor Brendon Lau owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended Computershare and REA Group Limited. 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 Scott Phillips.

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