Excuse the obvious pun, but Rolls-Royce shares have been on a roll since the beginning of 2023. Meanwhile, my portfolio has bumbled along, still licking its wounds from a very poor showing in 2022.
So, I was a complete fool for not buying in a few months ago, right? Yes and no.
Rolls Royce shares are flying
Based purely on capital gains, steering clear of Rolls-Royce shares has obviously been a poor decision on my part. The price has climbed 53% year-to-date (as I type) with the market embracing new CEO Tufan Erginbilgic’s no-nonsense approach to turning things around.
Put another way, I’d have made £530 on every £1000 I’d put to work at the engineer, excluding the costs of buying the stock.
This makes the company one of the best performers in the FTSE 100 (up 2.5% in 2023 (again, as I type)) and, indeed, the UK market as a whole.
Sure, holders won’t have received any dividends — Rolls hasn’t paid these in years — but I doubt they’re complaining.
Can it last?
The answer, of course, is that no one knows for sure. But let’s engage in a bit of harmless speculation.
On the one hand, recent trading has been encouraging with the company recently revealing underlying operating profit of £652m for 2022. That’s 36% higher than the figure analysts were banking on (£478m).
Unsurprisingly, this has shaken up the market’s view on Rolls. Investment bank UBS, for example, has recently posted a 200p target for the shares. If the re-opening of China goes better than expected — and more flights are taken on planes equipped with the company’s engines — this might prove conservative.
On the other hand, I suspect some traders are itching to bank some profit. The general rise in UK share prices we’ve seen over the last few months could also turn out to be a temporary respite and supply chain woes might continue to impact business activity.
So, Rolls-Royce shares could conceivably fall from here even if the company does everything right.
But none of the above helps me to make a decision about whether to buy. Here’s what does.
Quality business?
As a Fool, I’m in the business of buying, well, great businesses. I also want to hold them for a long time. This puts me in the same camp as Warren Buffett and the UK’s own Terry Smith, albeit only in terms of mentality rather than wealth.
However you shake your stick at it, the FTSE 100 member hasn’t performed well over a longer time period. Take a look at the share price performance over the last five or 10 years for evidence.
My reasoning on this is simply that Rolls just doesn’t exhibit the ‘quality’ hallmarks that help to compound growth. Operating margins are fairly slim and occasionally negative. There’s a fair dollop of debt on the balance sheet. Most importantly for me, returns on capital — what the company generates as a result of money it puts to work — are consistently and woefully low.
So, as encouraging as recent performance has been, this does not strike me as a ‘set and forget’ stock. For these reasons, I still won’t be buying Rolls-Royce shares.
However, my congratulations to anyone who has managed to ride the positive momentum so far.
The post Rolls Royce shares have soared! Was I a fool not to buy them? appeared first on The Motley Fool UK.
Pound coins for sale — 51 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
3 reasons Rolls-Royce shares could be worth buying today
Can the Rolls-Royce share price hit 200p in 2023?
With the share price above £1.50, is it time to offload Rolls-Royce stock?
Is Rolls-Royce stock now a screaming buy?
Could Warren Buffett buy out Rolls-Royce?
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.