Why I'm avoiding WiseTech Global shares

WiseTech Global Ltd (ASX: WTC) has delivered tremendous returns to shareholders over the past 3 years, but are the shares overpriced?

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WiseTech Global Ltd (ASX: WTC) has delivered tremendous returns to shareholders over the past 3 years, with an average annual rate of return in excess of 90%. However, WiseTech shares currently trade with a price-to-earnings ratio in excess of 200, which indicates to me that these shares are incredibly expensive. This is why I'll be avoiding WiseTech shares at this time.

Reasons to be cautious with WiseTech shares

Given WiseTech's performance over the past few years, I can understand why some investors would like to own its shares. Unfortunately, a previous history of strong returns to shareholders does not guarantee strong returns into the future. Likewise, even if WiseTech continues to be a very successful company, new investors may not be handsomely rewarded. This is because the price paid for WiseTech shares will be a limiting factor in the long-term returns investors receive.

An obvious but important rule of investing in shares is to buy low and sell high. Logically, when you pay a price that is high initially, this becomes harder to achieve. I believe a high price is one that is well above the underlaying value of a share and I consider this to be the case for WiseTech shares. If this premium above value is not maintained the share price will fall, irrespective of changes in the share's underlying value.

Other expensive ASX 200 shares

There are a number of other shares currently trading on the ASX that I believe are expensive. These include shares in A2 Milk Company Ltd (ASX: A2M), Altium Limited (ASX: ALU) and CSL Limited (ASX: CSL). I will avoid buying shares in these companies until more attractive prices are available.

Foolish takeaway

I believe long-term investors should pay close attention to the price of a share before investing. In my opinion, a share investment should only take place when there is confidence that the future share price will be much higher than the current price. This likely involves investing in shares that trade at a price close to or below true value.

Value is subjective and can be hard to calculate. Therefore, in an ideal world investors would only invest when the share price is well below true value, giving the investor a margin of safety. This may, however, make it impossible to buy into a high-quality companies, like Cochlear Limited (ASX: COH), which are unlikely to trade at any significant discount.

Motley Fool contributor Mitchell Perry has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of WiseTech Global. 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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