Lloyds and Rolls-Royce shares are rising. Should I buy now?

Lloyds and Rolls-Royce shares have rallied in past month but are they worth buying now? Nadia Yaqub takes a closer look.

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Lloyds (LSE: LLOY) and Rolls-Royce (LSE: RR) shares are receiving a lot of attention right now. It’s not surprising to see why Hargreaves Lansdown investors are buying both stocks. The two companies were hit hard by the global pandemic.

In the last month Lloyds and Rolls-Royce shares have rallied. But does this mean I should buy now? Let’s look at each company in turn.

Lloyds

The uncertainty of Brexit, Covid-19 and low interest rates haven’t been the ideal mix for Lloyds. Despite these far from perfect conditions, the bank is weathering the storm.

Lloyds is the UK’s largest mortgage provider. In its recent results, the bank saw a significant increase in mortgages. This was boosted by the stamp duty holiday introduced by the Chancellor in July until the end of March 2021. I expect Lloyds to see strong demand in mortgages until then.

Beyond March, I would expect the UK government to implement other measures to prevent the property market grinding to a halt. Additional measures will clearly be positive for Lloyds. Since the 2008 financial crisis, it has improved its financial position and this means it should be able to get through the global downturn.

I expect low interest rates to stay for a while. This means that Lloyds isn’t paying much out on deposits. But it also means that the rates on loans are close to low levels. If Lloyds can survive on these low rates, I expected it to emerge from the crisis.

Lloyds has announced change at the top with a new CEO, Charlie Nunn, a former HSBC banker. Nunn will replace António Horta-Osório, who has been in his post for a decade. A new CEO means that a fresh strategy will likely be revealed after Nunn’s arrival. A fresh pair of hands to steer the ship through murky water is just what Lloyds needs.

With the share price at these levels, I will be adding it to my portfolio.

Rolls-Royce

Rolls-Royce makes most of its money by manufacturing and servicing engines for the airline industry. Since coronavirus drove the industry to a halt, this has decimated Rolls-Royce’s revenue. A Covid-19 vaccine means that tourism can bounce back and the company can start to do its job again.

I believe that Rolls-Royce has done enough to weather the crisis. It has strengthened its balance sheet by raising capital through a rights issue. It’s preserving cash by making cost cuts so that the company is in a leaner position going forward.

Rolls-Royce also derives 20% of its revenue from its defence contracts with the UK and US governments. This should provide it with revenue visibility and stability.

Rolls-Royce shares have recently surged after the the company said that the coronavirus crisis has enabled it to develop new technology and hinted that it may re-enter the narrow-body jetliner market. It has until now focused on the wide-body plane sector, which has been hit hard by the pandemic. This news is refreshing as it offers the business a way to diversify its revenue and adapt to even the toughest times.

Rolls-Royce shares look like a bargain to and as an investor with a long-term  outlook, I’m adding the stock to my portfolio.

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.

Nadia Yaqub has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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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