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Do NOT Sell Reckitt Benckiser Group Plc Now To Snap Up J Sainsbury plc & Wm. Morrison Supermarkets plc!

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 Sainsbury’s (LSE: SBRY) or Morrisons (LSE: MRW), whose shares still look a tad undervalued.

Here’s why such a move would not be wise, and why you shouldn’t swap your Reckitt holdings with any other shares carrying a higher level 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 a performance broadly in line with that of the FTSE 100. As it continues to look at ways to preserve profitability by cutting costs, however, Reckitt becomes an even more solid yield play, which will continue 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, you’d 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, Reckitt has 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. 

Sainsbury’s And Morrisons

At 265p, Sainsbury’s 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 Tesco to convince the market that its turnaround story will be successful. I have no doubt that shareholders of Sainsbury’s and Morrisons have benefited more from Tesco’s recovery than from upbeat trading prospects or positive news associated with their own businesses in recent weeks.

Of course, it’s encouraging that sales at Morrisons are declining at a slower pace than a year ago, as data from Kantar 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, Sainsbury’s 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 I’d trim exposure if I were invested. 

Of course, you have to decide what kind of risk you are willing to take right now, but if you want to achieve higher returns the easiest way would be to include in your portfolio one or two value stocks mentioned in this ad-hoc investment report, which is completely FREE! 

These companies have more solid financials and growth prospects than Morrisons and Sainsbury's, and could deliver pre-tax capital gains of 30%, which excludes hefty dividend payments!

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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has recommended Reckitt Benckiser Group. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.