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Why I’d Still Buy BP plc, Hold Reckitt Benckiser Group Plc & Dump Vodafone Group plc Right Now!

BP (LSE: BP) is rallying hard, with its stock trading at six-month highs, and I think it may hit 500p sooner than I expected. It looks like traders and brokers are reconsidering their short-term projections on oil prices, but there’s more to it: BP could easily trade at 600p a share by early 2016. 

Elsewhere in the consumer space, Reckitt‘s (LSE: RB) rally seems unstoppable (up 18% in 2015) — but should you reduce exposure if you are invested?

There’s no easy answer, I’m afraid, and your decision may depend on the speed at which interest rates rise in the West. Take it easy, you have plenty of time. To push the stock higher — say, to 6,600p a share, for an implied 10% upside from its current level — management may come up with the idea of offering a higher yield to shareholders via a special dividend, according to market rumours. That’s something you may want to bet on, in my view. 

Something you may want to avoid, however, is exposure to Vodafone (LSE: VOD)! Although I keep looking for reasons to invest in it, I can’t find any at the present time… and if you are invested, then you may have a good chance now to sell ahead of its full-year results, which are due on 19 May.

Are Oil And BP The Best Bet Of All? 

Fundamentals, global macroeconomic trends, oil prices as well as the relative valuation of BP stock over the last 20 years suggest you should have acquired the company at 400p a share in the last six months, but there’s still time to invest in it at 480p — although its higher risk profile could dilute your returns.

The reason why BP (up 15% in 2015) is one of my favourite picks in the market is not that BP is a takeover target — which is a concrete option, at least according to traders who have build long positions in BP following Shell’s £47bn offer for BG. Time and again — barring the Deepwater Horizon spill in 2010 — BP has proved to be good at managing expectations, and this time around in particular, with fast-falling oil prices, it seems to have swiftly reacted to a fast-changing economic landscape.

I like that, and I like its balance sheet and its cash flow profile more than its profit and loss statement, which are good enough reasons to consider BP ahead of first-quarter results, which are due on 28 April.

The annual general meeting is taking place today, 16 April, and management will have to give some straight answers to shareholders at a time when sector consolidation is on the cards. 

Is A Special Dividend Coming At Reckitt? And How About Vodafone’s Yield? 

It looks like Reckitt may be about to focus on yield (forward yield 2.1%) now that it is cutting costs to preserve margins and net earnings, which means that it could spend some of its cash pile to boost the all-in returns of its shareholders — its free cash flow yield is as high as 4.4%.

First-quarter results are due on 24 April. A special dividend would not be tax-efficient, but would make more sense than additional stock buybacks, and would likely be welcomed by investors as it would open a more generous payout policy into 2016 and beyond. A higher dividend could be easily financed either by Reckitt’s excess of cash or mildly higher leverage.

Talking of market-beating yield, I think Vodafone’s 5% forward yield will have to come down at some point — I don’t fancy its core cash flow profile.

Full-year results are due on 19 May, and I wouldn’t buy the shares (up 3% this year) ahead of results, which will likely show little value in Vodafone’s current strategy — earnings multiples are not particularly reliable, but its paltry valuation is reflected in its adjusted core cash flow multiples for 2015 and 2o16, which stand at around 7x. Debt must fall, and the sooner the better.

My suggested price target, also based on the fair value of its assets and write-down risk, is 200p a share into the third quarter, for an implied 12% downside. 

Fed up with Vodafone-like stocks? Think BP is too cyclical and Reckitt may be about to peak? 

Then take a look at our FREE value report, which highlights a few alternatives, including one small cap, a services operator, whose stock is dirt cheap based on its relative valuation, forward yield and fundamentals. No kidding: the shares of this company have tripled since mid-2013!  

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