Stocks should never be traded for tax purposes. Far better is buying or selling based on a company’s fundamentals and valuation. Tax considerations should be secondary.

All too often, investors dump underperforming stocks and cut their losses in the lead-up to June 30. Then they sell high-performing stocks that are still undervalued to offset capital gains against losses in a mad end-of-financial-year (EOFY) rush.

Worse, they buy back into stocks in the New Financial Year when everybody else is doing the same, at elevated prices. This pattern explains why savvy investors “sell in May and go away” – they get in before novice investors, knowing a seasonally weak period is imminent.

Those who employ EOFY strategies need to go hard and early, not leave it to a week or two before June 30. I suggested in April, in the Switzer Super Report, that readers take profits and reduce market exposure. Not as part of an EOFY strategy, but because the market looked overvalued and ripe for a pullback that soon eventuated.

If you do sell for tax purposes, seek financial advice first or do extra homework on how the sale affects your tax position. Every investor is different and selling stocks that have had multi-year rallies, depending on when you bought, can leave big tax bills.

Below are three stocks to take profits on. Each is a high-quality company that has run too far, for now. Taking profits makes sense regardless of the June 30 deadline.

1. AGL Energy (AGL)

Few saw the boom in AGL’s share price coming this financial year. I didn’t. The integrated energy provider, and owner of renewable energy assets, soared from a 52-week low of $16.51 to a high of $28.47, before easing to $25.72. AGL traded near $12 in late 2014.

AGL has a valuable industry position – it dominates electricity retailing in Australia with Origin Energy and Energy Australia. AGL has defensive earnings, reliable dividends and low debt. It has taken soaring wholesale power prices to put a rocket under its share price.

Sharp increases in forward wholesale electricity prices, courtesy of the closure of Victoria’s Hazelwood power plant, lifted expectations of higher earnings for AGL. Investors believe the company will be able to pass on much of the rise to customers and boost the bottom line.

AGL has done a good job of managing expectations about how quickly higher wholesale prices will translate into higher profits. But the market may have got ahead of itself, such is the unrelenting news about Australia’s energy crisis and political debate on how to solve it.

The key question is AGL’s valuation. As electricity prices rise, so too do regulatory risks for AGL, with the likelihood of greater Federal and State efforts to lower prices. Also, it is possible that electricity prices are close to peaking as more power generation, notably in Queensland, comes online.

The market may have overestimated the electricity sector’s capacity to pass on significantly higher prices for longer to retailers, and thus AGL’s forecast earnings and valuations.

AGL is well-run and in an attractive sector. But a forecast Price Earnings (PE) of almost 17 times FY18 is a touch rich for a commodity provider.

The average price target for AGL from a consensus of 13 broking firms is $25.95 and the average recommendation is hold. That looks too optimistic.

Taking profits on AGL, while it rides on a perfect storm for electricity consumers, appeals.

2. REA Group (REA)

One of my best ideas over the past decade has been to buy the big internet advertising stocks, such as REA Group and Seek, on significant price pullbacks. These stocks always looked expensive, so patience was required to buy them during market corrections.

That strategy worked well and REA Group has been among a favourite stock for years. My view was based on REA’s latent pricing power that stemmed from its market dominance. I love companies that lift prices – and get away with it – when demand slows.

REA continues to raise prices and, for all the industry grumbles, property vendors keep coming back. What choice do they have when REA is the market when it comes to promoting a house for sale to the widest possible audience?

But every stock has its price. For the first time in a long time, I am concerned about REA’s growth trajectory and whether it is sufficient to justify the valuation.

The company noted lower listing volumes in the third quarter of FY17. That means revenue growth, impressive as it is, is being driven by price increases. One wonders how far REA can take prices and whether its technology add-ons and extra services for vendors can justify the higher fees. Even great businesses such as REA have price constraints.

Moreover, arch-rival Domain is making more inroads and a possible private-equity takeover of its parent company, Fairfax Media, could inject vigour into the online property advertising market. A new owner of Fairfax will need to squeeze more juice from Domain, given it is the key to Fairfax’s valuation and potentially paying a larger takeover premium.

At the same time, there is more evidence of a property slowdown in Sydney and Melbourne. Not a correction or crash, just much-needed stabilisation of auction clearance rates and price growth.

Unlike many commentators, I do not expect a sharp downturn in property prices (notwithstanding apartments, in some capital cities). But there’s enough to suggest listing volumes for REA could face greater pressure in the next 12 months and that price increases will be harder to pass on as vendors tighten property marketing budgets.

REA has soared from a 52-week low of $45.50 to $64.20. It is trading near the 52-week high in a weak sharemarket and weakening property market. An average price target of $63.42 and a buy recommendation from a consensus of 12 broking firms is too bullish.

Share-valuation service Skaffold estimates REA’s intrinsic value at $55.38 in 2018. Prices below that would provide a sufficient margin of safety to buy back into one of Australia’s great companies.

3. Sydney Airport (SYD)

I nominated Sydney Airport as one of three stocks to sell before June 30 for this report, precisely 12 months ago. The others were Transurban and Macquarie Atlas Roads Group.

Sydney Airport, then $7.40, hit $5.87 in early February as institutions rotated out of the so-called “bond proxies” and into the cyclical growth stocks. As noted in this report, I became a little more bullish on Sydney Airport this calendar year after its price falls and as more signs emerged that the proposed Western Sydney Airport would be a minimal threat to the Sydney Airport’s competitive position.

Sydney Airport has rallied 24% since March and came within a whisker of its 52-week high a few weeks ago. Long-term readers know I have been keen on Sydney Airport for years, despite many analysts arguing it was overvalued and had too much debt.

The company is leveraged to the boom in inbound Asian tourism, has a fabulous monopoly asset and scope to lift earnings through retail and other initiatives. But it’s time to take profits again after the latest rally.

As US interest rates rise this year, and more fund managers become nervous about the valuations of bond proxy stocks (listed property trusts, infrastructure, utilities), Sydney Airport is an obvious selling candidate.

The same theme of selling overpriced bond-proxy stocks explains why I have gone cold on Transurban Group, for now. More on that in a later column.

A consensus of 12 broking firms has a price target of $6.92 for Sydney Airport and the average recommendation is hold. Morningstar’s $6.50 estimate looks appropriate.

Tony Featherstone is a former managing editor of BRW and Shares magazines. All prices and analysis at June 13, 2017

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.