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Why I think it could be time to take profit on Macquarie Group Ltd (ASX:MQG)

It pains me to say this, but it may be time to take profit on one of my favourite stocks even as it flirts with a record high share price.

The stock is Macquarie Group Ltd (ASX: MQG) and its shares are up 0.9% at the time of writing to $125.71 – a fraction off its all-time high of $126.70 that is hit in June.

This makes the investment bank one of the best performing financial stocks on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index as it has notched up gains of 46% over the past year when the broader market is up 12%.

The performance of the bank stands in sharp contrast to its disgraced peers facing the Banking Royal Commission, such as Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (ASX: NAB) and AMP Limited (ASX: AMP).

But shares in Macquarie may soon run out of puff and it isn’t only a recommendation downgrade on the stock by UBS that is turning me cautious on the stock.

UBS noted that Macquarie had a good run and has cut its rating on the stock to “neutral” from “buy” even though the outlook for the bank continues to look good as it benefited from the market-wide re-rating of growth stocks that has also propelled the share prices of blood products maker CSL Limited (ASX: CSL) and gaming machine maker Aristocrat Leisure Limited (ASX: ALL).

“While earnings momentum in these companies remains, the spread between high PE [price earnings] and low PE stocks has widened materially and has been a key driver of the index,” said UBS who has a $122 a share price target on Macquarie.

“As a result, from a strategy perspective, we believe a degree of caution to this area of the market (including MQG) appears warranted.”

The observation coincides with my view that the market is primed for a pullback post the reporting season.

Our market has enjoyed a good run and the pleasing profit season has given investors a further excuse to bid-up stocks, but geopolitical risks are building and our market is starting to look a little expensive. I think a breather is needed for a few months before we head into the buoyant Christmas trading period.

If the market does enter into a period of weakness, Macquarie will likely suffer more than other high PE stocks given that its earnings are leveraged to capital markets.

If I am right, selling some of my Macquarie shares at around current levels will give me an opportunity to buy back the stock at a lower price in the coming months.

Supporters will point out that the bank is scheduled to hand in its earnings report card in November and that management is likely to beat guidance.

But I believe that is already in the price as management has a habit of always delivering above and beyond. I won’t be surprised if Macquarie becomes a classic “buy the rumour, sell the fact” trade ahead of its results announcement.

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Motley Fool contributor Brendon Lau owns shares of Aristocrat Leisure Ltd., Macquarie Group Limited, and National Australia Bank Limited. The Motley Fool Australia owns shares of National Australia Bank 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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