Image source: Rolls-Royce plc
Rolls-Royce (LSE: RR) shares have staged a remarkable recovery. Indeed, it’s been one of the best performers in the FTSE 100 for a while.
Just how much money could I have made if I’d had the foresight (or luck) to invest £1,000 when the stock sat at its lowest value in the last year?
Strong momentum
Let’s cut to the chase. As I type, the Rolls-Royce share price is up 174% since its 52-week nadir of just under 83p. So my ‘stake’ would now be worth £2,740 (excluding purchase costs).
That’s a wonderful result for new(ish) holders. What I find even more impressive however, is that the stock has experienced barely any price volatility over this period.
This lack of instability is interesting considering the last year hasn’t exactly been devoid of negative macroeconomic and geo-political events.
By comparison, the FTSE 100 is just about in positive territory over the same time period. So Rolls’ resurgence is yet another reminder that buying a stock when no one else will has at least the potential to wallop the market return in a small amount of time.
Transformation under way
To confirm, I didn’t invest in Rolls-Royce last November. However, my attitude to the company has definitely become more positive since the arrival of seemingly ‘no-nonsense’ CEO Tufan Erginbilgiç.
Having described the company as a “burning platform” at the beginning of his tenure, the new leader has now axed 2,500 non-engineering jobs in an attempt to reduce duplication and streamline what’s a highly complex business.
In addition to this, Rolls has clearly benefited from the post-pandemic resurgence in demand for travel. Put simply, more planes in the air means more demand for the company’s maintenance services.
All this helps to explain why, in sharp contrast to FTSE 100 peers like Kingfisher, Hargreaves Lansdown, Ocado and Sainsbury, short-sellers are steering clear. In other words, there’s no evidence that a significant minority of highly-researched traders believe recent gains are about to be lost.
That said, there are still a few things to be aware of.
All priced in?
As I type, Rolls-Royce shares trade at 24 times forecast FY23 earnings. That strikes me as pretty full. After all, trading can be pretty cyclical and margins, while improving in recent years, aren’t exactly stellar. As it happens, the latter is one of the ‘quality hallmarks’ that I look for and has been shown to compound wealth over the long term. That’s our favourite investing horizon at Fool UK.
For now, at least, there’s no dividend stream either. So I wouldn’t be compensated for my patience if the stock dropped in value from here. Now that’s something I would get from a FTSE 100 tracker. And because my money is spread around the whole index, that passive income is a lot more reliable.
Cautiously optimistic
Even so, I’m inclined to think that this rebound could still have legs to it. This is especially true if inflation falls as expected over the next few months. The prospect of a subsequent drop in interest rates would provide an additional boost, especially as the £19bn-cap still has a big dollop of debt on the balance sheet.
Although this stock doesn’t fit my personal investment strategy, I reckon there’s still money to be made here.
