Whether they know it or not, many Australians own Wesfarmers Ltd (ASX: WES) and Commonwealth Bank of Australia (ASX: CBA) shares via their super funds.
That's because the two S&P/ASX 200 Index (ASX: XJO) stocks both count amongst the top ten listed Australian companies in terms of market cap.
The stocks are also popular among passive income retail investors for their reliable, fully-franked dividend payouts.
Wesfarmers shares trade on a fully-franked dividend yield of 3.3%. And CBA shares trade on a fully-franked dividend yield of 2.9%.
But at their current valuations, Morgans' Damien Nguyen believes investors would do well to sell their shareholdings and look elsewhere for better opportunities (courtesy of The Bull).
Here's why.
Image source: Getty Images
CBA shares trading at premium to peers
"CBA is a high-quality company," said Nguyen. "But the bank's valuation has stretched well beyond peers, reflecting investor preference for safety and consistency."
Commenting on his sell recommendation on CBA shares, Nguyen said:
Much of the good news, including strong deposit margins and sector leading returns, is already priced in, leaving limited scope for upside from here. We see better value elsewhere in the sector and believe the current premium leaves the stock vulnerable to even modest disappointment, which supports our sell rating at these levels.
CBA trades on a price-to-earnings (P/E) ratio of around 26 times.
Which brings us to…
Should you sell your Wesfarmers shares today?
Atop his bearish medium-term outlook for CBA shares, Nguyen also foresees potential headwinds building for Wesfarmers shares.
"This industrial conglomerate is a well-managed and diversified group, but market pricing has become demanding after a strong run," Nguyen said. "Bunnings and Kmart continue to perform well, but the retail environment is softening."
He noted:
The current valuation appears to assume sustained strength across all divisions, leaving little margin for error should consumer spending weaken or emerging businesses take longer to deliver meaningful returns.
Commenting on his sell recommendation, Nguyen concluded, "While Wesfarmers remains a high-quality operator, its risk‑reward profile looks unfavourable relative to other opportunities, supporting a cautious sell for now."
Wesfarmers shares trade on a P/E ratio of around 28 times.
How have Wesfarmers and CBA shares been tracking?
Down 0.6% in late morning trade today at $75.64 a share, Wesfarmers shares are up 2% over 12 months. The ASX 200 stock has slumped 15.3% since reporting its half-year results on 19 February.
CBA shares are up 1.1% at the time of writing, changing hands for $173.82 each. This sees CommBank stock up 11.1% over 12 months. Shares are up 9.4% since CBA reported its half-year results on 11 February.
