Buy, Hold, Sell: Commonwealth Bank (ASX:CBA), CSL (ASX:CSL) and Challenger (ASX:CGF)

The share prices of businesses are always changing, meaning what you should do with a share can change based on its valuation.

If a share looks good value then obviously it’s a ‘buy’. If it looks overly expensive then it’s a ‘sell’. If you’ve bought it and it’s had a good run it may not be worth buying or selling, it’s simply a ‘hold’.

So, here’s one of each:

Buy: Challenger Ltd (ASX: CGF)

The retirement income business has made a bit of a recovery after revealing more growth of its funds under management (FUM) in the first quarter of FY19. However, it is still far below its all-time high of within the last year.

I think Challenger is one of the best financial shares on the ASX because it is heavily exposed to the growing number of retirees in Australia. The number of people over-65 is projected to increase by 40% over the next decade and 70% over the next two decades.

Supportive government policies, restrictive capital requirements limiting competition and additional distribution channels could mean Challenger continues growing nicely for the next decade.

Challenger is currently trading at under 16x FY19’s earnings.

Hold: CSL Limited (ASX: CSL)

CSL is Australia’s largest healthcare business with its large plasma product business and suite of other treatments.

I believe it could be the highest quality share in the ASX 20 due to its defensive earnings profile, the expected growth of its core portfolio of products and the large level of R&D it carries out each year. The business is investing for long-term growth and that means I think it’s worth holding for the long-term too.

However, despite the share price falling from $230 to $182 over the past two months I think it’s still a little expensive – it may keep falling so I’d want to see it stop declining before considering a buy.

Sell: Commonwealth Bank of Australia (ASX: CBA)

The country’s biggest company has been a strong performer for shareholders over the past three decades, however I think that growth has now come to a firm halt.

It is facing a slowdown of credit growth due to the Royal Commission and the falling housing market. Refunds and compensation are costing the major banks hundreds of millions of dollars which could harm earnings for the next few years – particularly if an expensive class action goes ahead.

Commonwealth Bank’s grossed-up dividend yield of 9.2% may seem good but there is a decent chance that it may be reduced due to various factors including higher capital requirements.

Foolish takeaway

I’m hopeful that CSL will stop falling and that it will be a good long-term buy, but it could be worth being patient for a better price. However, I’m confident about Challenger’s outlook for the next decade – rising interest rates could make its valuation even more attractive over the next year.

Another top growth share I have high on my watchlist is this top stock which just grew its profit by 30% in FY18 with more profit growth predicted this year.

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Motley Fool contributor Tristan Harrison owns shares of Challenger Limited. The Motley Fool Australia owns shares of and has recommended Challenger 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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