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Investors are buying this FTSE 100 stock. Should I?

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I always find it interesting to see which shares are being snapped up by other investors. Last week was no exception. Over the weekend, Hargreaves Lansdown revealed that one of its most popular buys had been FTSE 100 company Reckitt (LSE: RKT).

Should I be adding this consumer goods behemoth to my shopping list too? 

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FTSE 100 laggard

Based on recent performance, only contrarians need apply. Reckitt fell almost 12% in value over the previous trading week. All told, this meant that Reckitt’s shares had tumbled 30% since the end of July 2020. Contrast this with a 17% rise in the usually pedestrian FTSE 100.

At first glance, this fall seems odd. After all, this is a company that owns Dettol and Lysol — brands that shoppers have been flocking to over the last year as we’ve all become just that little more conscious of keeping things as clean as possible.

Unfortunately, it would seem that inflation is beginning to bite. A rise in the price of raw materials in the first six months of 2021 is having a negative impact on profit margins at the FTSE 100 constituent. Factor in the potential for sales of disinfectants to moderate as we emerge from the Covid-19 storm and Reckitt’s loss of momentum makes some sense.

Time to buy?

I think there are arguments for and against me buying this stock now.

The former includes the fact that Reckitt boasts a portfolio of easily recognisable, ‘sticky’ brands (which also includes Air Wick, Calgon and Durex). It seems fair to say that demand for its products will never evaporate, even if cheaper alternatives are available. This gives Reckitt a defensiveness some other companies in the FTSE 100 arguably lack. It also makes the valuation of 19 times forecast earnings tempting, in my opinion. 

The dividend stream compensates holders as well. I expect Reckitt to return 175p per share to holders this year. That’s a nice 3.2% yield at today’s share price  — far more than I’d get via a Cash ISA.

Although one should not draw too many conclusions from such as small period of trading, it’s worth highlighting that Reckitt didn’t feature in the list of most popular sells last week either. This may suggest that a least some of those buying now have the intention of staying invested for a while. 

Ongoing weakness

Of course, how long a full recovery takes is up for debate. As things stand, no one can be sure whether inflation is here to stay. If it is, there’s no guarantee Reckitt will be successful in passing on costs to consumers via price hikes. The shares will probably resume their downward momentum if sales decline. 

Regardless of this, performance over the long term hasn’t exactly been stellar. Annualised returns at Reckitt have been only slightly better than the FTSE 100 over the last 10 years. Those advocating a no-frills passive approach to investing would use this as proof that buying a specific stock rather than an exchange-traded fund isn’t worth the additional risk. So, the question I need to ask myself is whether I’d get a better result over the next decade.

On the fence

For now, I’m content to watch Reckitt from the sidelines. While I do think it will eventually recover, I also think there are potentially far better options in the index for me to make money in the meantime.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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