Reckitt(LSE: RB) is on a roll and has been trading at all-time highs. So, you may be tempted to take a profit and bet either on Sainsburys(LSE: SBRY) or Morrisons (LSE: MRW), whose shares still look a tad undervalued.
Heres why such a move would not be wise, and why you shouldnt swap your Reckitt holdings with any other shares carrying a higherlevel of risk.
Reckitt On The Rise
Why is Reckitt up?The answer is straightforward: before it announced its full-year results and a new cost-savings program this week, Reckitt had recorded aperformance broadly in line with that of theFTSE 100. As it continues to look at ways to preserve profitability by cuttingcosts, however, Reckitt becomes aneven more solid yield play,which willcontinue to surprise investors over the years in the same way it has surprised them for more than a decade now.
If you had invested in Reckitt in January 2000, youd have now recorded a paper gain of about 900% roughly 60% a year, excluding dividends. In a low interest rate environment, this is a company that will likely continue to fare well, boosting value for shareholders, regardless of its growth prospects.
In spite of senior management changes over the years, Reckitthas continued to operate efficiently, seeking opportunities such as acquisitions, while divesting non-core assets offering lower returns. It will continue to do just that over time, I reckon, so its trading multiples could easily expand further.
With a solid balance sheet and a strong free cash flow profile, Reckitt remains one of my preferred investments for the medium term.This is an ideal choice for a balanced portfolio: exposure should be increased or reduced depending on market conditions and your risk appetite. It can easily be argued that Unilever, for instance, is likely to deliver lower returns, although I do not dislike it, either.
Sainsburys And Morrisons
At 265p, Sainsburys is still a decent opportunity, and the same applies to Morrisons, which trades at 185p. The forward valuation of both stocks, however, also depends on how long it will take for market leader Tescoto convince the market that its turnaround story will be successful. I have no doubt that shareholders of Sainsburys and Morrisons have benefited more from Tescos recovery than from upbeat trading prospects or positive news associated with their own businesses in recent weeks.
Of course, its encouraging that sales at Morrisons are declining at a slower pace than a year ago, as data fromKantar Worldpanel showed this week,but Morrisons is still in the midst of a comprehensive restructuring, is losing market share and needs new leadership.
Morrisons said on Thursday that the search for a new boss is progressing well finance director Trevor Strain will take the helm while a replacement for Dalton Philips, who is leaving the company earlier than expected, is found. But investors need more evidence to pay up for the stock and push it up above 200p, in my view.
By comparison, Sainsburys is losing market share at a faster pace, while sales are also declining at a faster pace. Its lowly valuation may still offer upside at this level, but I would steer clear of them for some time, or Id trim exposure if I were invested.
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