I think it’s widely accepted that many ASX stalwarts currently trade at high valuations despite having rather ordinary growth prospects.

This is especially visible when you compare the valuation levels of these shares to those of similar companies on the ASX and abroad.

While no firms are ever truly alike, I thought I’d look for alternatives to some big ASX names that our analysts think are seriously overvalued.

This will involve looking at a few foreign shares, so let’s revisit a couple of things to consider before going global with your portfolio.

1.Lack of franking credits

At Morningstar, we think that investors should seek securities that, above anything else, are suitable in the context of their goals.

If generating income from shares is important to you, you can’t ignore the fact that global dividends get less favourable tax treatment than franked Australian dividends.

At the same time, though, you should be open to the possibility that the valuation or yield discrepancy could more than offset this.

2.Added complexity and fees

The act of buying and selling global shares will usually attract higher trading and FX fees from your broker. Transacting in foreign shares or receiving income from them can also bring an increased tax reporting burden.

We have written about the opportunities and trade-offs of investing in global shares a lot. You can read this article by my colleague Shani about the potential tax implications.

Let’s move on to looking at the three expensive shares and potential alternatives.

For those not familiar with Morningstar’s approach, you will find an explanation of terms like Star Rating, Moat Rating and Fair Value at the bottom of this article.

A cheaper alternative to CBA?

You are likely no stranger to the fact that Commonwealth Bank (CBA) trades at a far higher level relative to earnings and book value than most banks on Earth.

Our analyst Nathan Zaia thinks the shares are materially overvalued. They recently traded hands at around $180 per share compared to his Fair Value estimate of $98.

As I wrote in this article on CBA’s valuation versus other moaty banks, finding suitable comparables for a lender can be hard. In CBA’s case, the closest I got was Lloyds Banking Group (LON:LLOY) in the UK.

Lloyds has a less favourable regulatory backdrop than CBA enjoys in Australia. But it has similar focus on retail banking and huge market share in a market dominated by a small number of players. Our analyst Niklas Krammer has awarded Lloyds a Narrow Moat rating due to its sticky, low-cost deposit base and its relative scale.

But while CBA and Lloyds may have a few things in common, their valuations are on a different planet.

CBA has a price-to-book ratio of over four times while Lloyds recently traded at roughly 1.5 times tangible book. Their Star Ratings are also very different: one star for CBA and three for Lloyds, which trades in line with Niklas’ Fair Value estimate.

One thing you might not get from Lloyds is a significantly higher yield after tax. The shares have a forecast gross yield of around 4%, which isn’t that much higher than Nathan’s estimate that CBA can deliver a grossed up 3.7% in fiscal 2026.

If investors are seeking a higher post-tax yield, they may find better alternatives closer to home.

In our article on CBA’s spicy valuation, Nathan pointed out that CBA’s Wide Moat peer Westpac (WBC) has the potential to deliver around 6% grossed up.

The shares recently traded around 16% higher than his estimate of Fair Value, but still appear to have less valuation risk baked in than CBA. Westpac currently has a two-star Morningstar rating.

A cheaper alternative to Wesfarmers?

Our retail analyst Johannes Faul views Wesfarmers (WES) and its core asset Bunnings as high quality businesses. He just doesn’t like Wesfarmers’ valuation.

It trades almost 50% above his Fair Value estimate and commands a price-to-earnings ratio of more than 37 times, even though Johannes only sees it growing revenues at 4% per year over the next five.

Again, finding a true alternative here is hard.

Wesfarmers isn’t just Bunnings. It is Kmart, Officeworks, some lithium operations, and more. Given that Bunnings is the biggest asset though, I decided to take a look at American home improvement supremo Lowe’s (NYS: LOW).

As our analyst Jaime Katz says in her report on Lowes, it is the world’s second biggest player in its field with sales expected to top USD 80 billion this year. Jaime thinks the company has carved out a Wide Moat.

Not too dissimilar to Bunnings, Jaime puts some of this down to Lowes’ ability to pass on the benefits of its huge buying power to customers through lower prices. This makes it very hard for smaller players to compete.

At around USD 280 per share, Lowes shares trade roughly in line with Jaime’s estimate of Fair Value and currently have a Star Rating of three. On that basis, Lowes definitely looks a lot cheaper than one star Wesfarmers. Even if it doesn’t scream cheap.

Again, there may be cheaper and closer alternatives in the domestic market. Alcohol retail group Endeavour, for example, also enjoys a cost advantaged competitive position and offers exposure to the Australian consumer.

Johannes ascribes Endeavour (EDV) a Wide Moat rating and thinks the shares are worth $6.10 each or roughly 50% above recent market prices of $4.10. The shares currently have a five-star Morningstar rating.

Cheaper alternatives to Fisher & Paykel Healthcare?

Fisher and Paykel Healthcare (FPH) does not have “ordinary” growth prospects of the kind I mentioned at the start of this article. But I’ve included it here because global alternatives appear to offer considerably better value at the moment.

FPH’s strong position in hospital-based respiratory care and Narrow Moat rating is underpinned by proprietary technology and a strong suite of patents.

The company also benefits from potential switching costs for doctors using its product. Moving to a new and potentially less known supplier requires investing time to get familiar with the new solution and could also risk of poorer performance.

These competitive advantages have secured a market share of around 70% in its core market of providing apparatus for nasal high flow therapy in hospitals. And increased adoption of this method of care hints at a strong long-term growth outlook for the company.

However, this positive outlook appears to be more than reflected by the share price. FPH trades at roughly 40 times Shane’s forecast for earnings in 2028, and shares recently changed hands at prices almost 40% above Shane’s $25 Fair Value estimate.

Meanwhile, other moated healthcare equipment firms worldwide screen far more reasonably against our estimate of value. These include medical imaging giants Siemens Healthineers (FRA:SHL) and Philips (AMS: PHIA).

Our analyst Alex Morozov affords Philips a Wide Moat rating on account of switching costs and intangible assets in its medical imaging business. With a five star rating and a 40% discount to Alex’s Fair Value estimate, they certainly screen a lot cheaper than FPH.

Disclosure: I own Philips shares.

Two things to keep in mind

As I said at the start of this article, there are trade offs to consider before investing in global shares. And you may not need to go global to find competitively advantaged companies at reasonable valuations anyway.

After all, there are currently 25 ASX shares with Narrow or Wide moat ratings from our analysts and Star Ratings of four or better.

It’s also worth repeating that this was not a prompt to sell the “expensive” shares if you own them and buy the potential alternatives.

There may be other factors you should consider - and no decision should be made without considering your strategy.

For a step-by-step guide to defining your investing strategy, see this article by my colleague Mark LaMonica.

Get Morningstar insights to your inbox

Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.