Where I’m from up north, we have this saying, “Buy cheap, buy twice”. This means it’s a false economy to purchase cheap, inferior goods as they will disappoint or fail early. I see the same wisdom applying to buying cheap shares, especially during troubled times.
Cheap shares: beware of sickly companies
My adage warns us that things are sometimes cheap for a reason. When hunting for cheap shares, we must avoid the lurking ‘value traps’. These value shares just keep getting cheaper, often because the underlying businesses are in secular or long-term decline.
Right now, there are dozens of apparently cheap shares in the FTSE 100. Many have seen their stock prices crash by 50% or more. But there are reasons why some are so cut-price.
Cheap shares: buying into successful stocks
It would be impossible to convince me today to buy stocks in some sectors. These ailing sectors include leisure & entertainment, travel & tourism, and hospitality. For me, these areas offer too much instability, volatility and negativity to make them attractive to value investors.
My current approach to hunting down cheap shares is to emulate billionaire Warren Buffett. He says: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Recently, I’ve been seeking companies that are doing really well against the backdrop of the Covid-19 virus. Today, I added another great company to my list of cheap shares.
Reckitt Benckiser is a great British success
At first, Reckitt Benckiser (LSE: RB) shares don’t appear to fit the usual criteria for cheap shares. But I see this firm as a wonderful Anglo-British company that’s tackling the coronavirus head-on and winning.
RB’s products are household names – just look inside your kitchen cupboards and bathroom cabinets to find its brilliant brands. These include disinfectants Dettol and Lysol, which help to contain and kill Covid-19.
RB’s products fall into three categories: hygiene, health and nutrition. Its hygiene products include household cleanser Cillit Bang, Harpic toilet cleaner and Vanish laundry detergent. RB owns health brands including Clearasil spot cream, Durex condoms and painkiller Nurofen. RB is also big in baby nutrition with its Nutra and Nutramigen formula milks.
I see RB as a cheap ‘quality share’
The coronavirus has ravaged the FTSE 100, with the index own almost 18% over 12 months, and has created many more cheap shares. Yet RB shares have soared more than 20% to thrash the wider market over the past year.
Yet today, RB shares closed at 7,192p, slipping 12p and down 10.3% from their 52-week high of 8,020p set on 29 July. That was even though RB today released these outstanding results, showing strong growth in most categories and territories. Overall third-quarter sales growth was a healthy 6.9%, producing forecast-busting revenues of £3.5bn.
Today, RB is a £51.3bn British success story. Its shares are highly rated, but so is the quality of its rising revenues. Its dividend yield is only 2.4%, but I see plenty of scope for growth and special payouts. As I’ve said, it’s worth paying for quality. For me, RB stands for Real Bargain. That’s why I’d buy these cheap shares today inside an ISA for tax-free gains and a passive income!
