Commonwealth Bank of Australia (ASX: CBA) shares have led the charge on the ASX over the last 12 months.
In that time, the banking stock has notched several all-time highs, advancing more than 24% into the green. CBA shares are currently trading at $131.15, with a price-to-earnings ratio (P/E) of 23.2 times.
As one of the giants of the S&P/ASX 200 Index (ASX: XJO), CBA has been a significant contributor to the broader market's performance.
But with its high valuation, is it time to consider taking profits in CBA shares, or should investors stick with this winner?
CBA on a tear in 2024
The ASX 200 has climbed nearly 9% in the last 12 months, notching an all-time high itself on Wednesday.
This rally has been driven by a select few large companies, including the Commonwealth Bank. The question for investors is whether these giants can sustain the rally or if their valuations are overstretched, indicating that it might be time to look elsewhere.
A growing number of analysts suggest there is fragility among the giants like CBA.
The debate has intensified with this week's rally in US small-cap stocks, as some speculate that investors might need to look beyond the big names driving the market.
CLSA's Ed Henning is the only investment bank broker who does not recommend that clients sell CBA shares. According to the Australian Financial Review, he acknowledges CBA's high valuation but believes only a major economic shock will halt its rally.
Henning has a target price of $115.80 on CBA shares, implying a slither of upside from the current price.
But other analysts, like those at Bell Potter and L1 Capital, are more bearish. They highlight CBA's high valuation relative to its growth potential and suggest taking profits.
Time to sell CBA shares? Not so fast, research says
Research conducted by Arizona University has produced some startling results on the distribution of returns in global stock markets, according to the AFR.
Historically, a small number of listed companies — 4%, to be exact — have created wealth, and most (59%) have made investors poorer.
The research shows that dominant companies with the strongest market positions can compound year after year. CBA shares fall under this banner.
Barrenjoey analysts aren't convinced and note they "haven't seen a case where a stock has traded so far from its fundamentals, its peers, both domestically and internationally, and its own history…"
The broker cited one of the most integral investment wisdoms of all time, quoted by Benjamin Graham, teacher of Warren Buffett: "In the short run, the market is a voting machine, but in the long run, it is a weighing machine."
In that respect, if CBA's business is performing so well, why can't CBA shares continue compounding? Just like the 'winners' in the Arizona University study? Alas, the dilemma.
Foolish takeaway
While CBA has delivered strong returns, its high valuation is raising concerns among analysts. But research suggests that the market's winners can hold their place on the mantlepiece.
The question of whether to sell or buy a stock should never depend solely on its price movements. Stocks represent ownership in a business, and its fundamentals matter. Further, everyone's individual preferences and tolerances are different.
As always, conduct your own research. Consider your long-term investment goals, or talk to an advisor before making any decisions regarding CBA shares.
