Forget Rolls-Royce. I think this is a once-in-a-lifetime chance to get rich from UK small-cap shares!

Rolls-Royce Holding plc (LON:RR) shares have made big profits for contrarian investors, but Paul Summers thinks small-cap UK shares have more upside.

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Rolls-Royce (LSE:RR) shares have more than doubled since falling to a low of just over 100p at the start of October. That’s a simply stunning return for those brave enough to, in the words of Warren Buffett, ‘be greedy when others are fearful‘.

Personally, I’d be more inclined to gravitate towards other UK stocks at the current time, particularly those lower down the market spectrum. Here’s why.

The trouble with Rolls-Royce shares

The problem with buying shares in a battered company like Rolls-Royce is two-fold.

First, you have to remember who your competition is. Here at the Fool UK, we encourage people to see investment as a long-term endeavour. Unfortunately, a lot of people aren’t capable of being patient. Look at the recent volatility in cinema chain Cineworld as an example of this. Thanks to day traders, I think Rolls-Royce shares could lurch up and down for a while.

Second, it needs to be remembered that people are buying shares in a business that was hardly firing on all cylinders before coronavirus reared its ugly head. Even with Covid-19 gone, there’s no guarantee Rolls-Royce will then thrive.

This isn’t to say investing now won’t work out well. News of a vaccine could turbocharge all UK share prices. Then again, no one should approach the £5bn-cap without appreciating the myriad of challenges it faces.

Taking this into account, I’m finding it difficult to muster any enthusiasm to buy Rolls-Royce shares right now. For me, there are better opportunities available elsewhere in the market. This is especially true in the small-cap space.

Top manager pulls IPO

Yesterday, it was announced the Buffettology Small Companies Investment Trust wouldn’t be listing on the market, having been unable to raise the £100m fund manager Keith Ashworth-Lord was looking for.

This news is significant because Ashworth-Lord is arguably one of the UK’s best stockpickers. Had one invested in his CFP SDL UK Buffettology Fund when it launched in 2011, that money would have grown by a little over 230%, according to its latest factsheet. The sector average? Just 59%! He certainly didn’t achieve this owning Rolls-Royce shares.

The shelving of the IPO suggests the UK market is utterly unloved at the moment. This is, to an extent, understandable. With Covid-19 infection rates rising, talk of another national lockdown in England won’t go away. Should further travel restrictions be put in place, it’ll be time for investors to hide behind their sofas. There’s also Brexit to ponder.

Nevertheless, this is exactly why I think now is a once-in-a-lifetime chance to buy UK small-cap stocks!

Go small

Unlike Rolls-Royce, many UK-listed minnows possess robust balance sheets with minimal/no debt. Many also operate in far more defensive sectors than the FTSE 100 engineering firm. Fewer working parts also allow small-caps to be far more nimble in grabbing market opportunities. Most importantly, small-cap shares have been shown to massively outperform the giants over the long term.

As investors, we’re taught to buy ‘when there’s blood on the streets‘. While this can be a path to riches, I’d argue it’s still very dependent on which ‘street’ you select.

For me, now’s the time to buy small-cap UK stocks with quality characteristics and solid outlooks. I’ll leave Rolls-Royce shares to the traders. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

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