Rolls-Royce (LSE: RR) shares have been unusually volatile for a FTSE 100 company in the last three months. I think this is reflective of just how divided investors are on its future prospects. To some, its fundraising means it will survive and then thrive once air travel returns to normal at some point in the coming years. Or perhaps after a successful vaccine is rolled out.
To others, the company was on a downward slope since pre-Covid and has just been further weakened. I’ll confess I’m in the latter camp. I think the volatility now and the weak long-term prospects mean it’s a poor long term investment. Rolls-Royce shares are better left to day traders and speculators, in my opinion, given the volatility and balance sheet weakness. I definitely wouldn’t add them to my portfolio. Here’s why.
Investing in Rolls-Royce shares
Rolls-Royce shares fell 22% between the start of 2018 and the start of 2020. I think that’s proof this wasn’t a company firing on all cylinders before the pandemic came along and wreaked havoc with its business model. That model relies on planes flying. That has led to the shares falling 60% so far this year and at points far further than that. To survive, management has had to call upon the wallets of investors and raise cash.
Investors seem to be treating its fundraising rights issue as a good thing. It’s not, I feel. It dilutes their stake and is a red flag that a company is struggling. That’s perhaps forgivable if the company is doing it once and is in an industry hard hit by an unforeseen event like a pandemic. Less forgivable when management has been trying to turn around a company for years and has been failing.
I think the issues with the Trent engines mean Rolls-Royce could be losing its reputation. Remember, reputations are hard won and easily lost. I don’t think this bodes well at all. Customers are also less likely to want to buy from a financially weak supplier. A weak financial position will also increase borrowing costs for Roll-Royce. All in all, I’m not optimistic and don’t think Rolls-Royce shares are worth buying for my own portfolio.
A better alternative
I prefer the look of another UK engineer. I think Goodwin, which is far smaller and therefore could grow quicker, could be a much more profitable investment. It’s a family business, which many growth investors like to see. It means decisions are usually taken with a longer-term view so the business can be passed down generation to generation.
The Staffordshire-based firm has products that can be applied to a wide range of industries from defence through to mining and jewellery. If I had invested in Goodwin at the beginning of 2018, I’d be up by around 60%. That’s even after taking into account this years market fall and excludes dividends. That’s a decent return and one I expect the business can keep improving on. That’s why I much prefer the outlook for Goodwin’s shares over Rolls-Royce shares.