Rolls-Royce and Cineworld: are these UK shares too risky to buy now?
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There’s more in common between Rolls-Royce (LSE: RR) and Cineworld (LSE: CINE) than meets the eye. RR is an engineering giant while CINE is the second largest cinema chain in the world.
In the eye of the storm
Both, however, have been in the eye of the storm since the corona-crisis started. As a supplier to airlines, RR has been hugely impacted by the lockdowns. Cinema outings have been disallowed for much of the past year too, impacting the share price.
Both companies’ financials have been shaken because of this. Each has raised funds to get through this time too. These developments have impacted their share prices, which are now trading at less than half their levels at this time last year.
The rising tide
That’s not all though. RR and CINE have positives in common too. For all their challenges in 2020, their share prices are on the path to recovery. At their worst, they were less than half of even their current levels.
Moreover, the UK just met its target of vaccinating 15m people in the country by February 15. With this speedy development, I think there’s more hope that we’ll see the end of the lockdown soon enough.
No wonder then, that today’s a good day for both these two stocks and indeed for many other Covid-19 impacted ones. While the RR share price is up over 2.5% as I write this Monday afternoon, the CINE stock is up over 8%.
What’s next for the stock markets?
But just because they have been on a similar journey, does it mean they are headed for the same destination?
I reckon that, barring any untoward developments, we could see a boost to the stock market rally as the return to the ‘old normal’ becomes imminent. Investors already believe that the FTSE 100 index is undervalued. If we add the Brexit and potential corona-crisis resolutions to the mix, investors in UK shares appear to have a winning year at hand.
If this happens, many shares’ prices could rally, especially if they were badly impacted in 2020. This of course includes both RR and CINE.
How the Rolls-Royce story can play out
But I think there are big long-term risks to RR. Including 2020, RR would have clocked net losses in four of the past five years. Even ignoring 2020, I’m uncomfortable with its performance in the pre-Covid-19 years. This is especially so now that it has raised more debt. RR has a long and impressive legacy, and I’m sure it can turn around at some point, but that doesn’t seem to be right now.
Cineworld can recover faster
CINE on the other hand, has seen sharp increases in revenues over the past few years, and has also shown net profits. So, I’m more willing to discount 2020’s performance as purely crisis-driven.
There’s a risk that CINE’s performance may take some time to recover. And that’s worrisome at a time when its debt too has increased. Yet, on balance, I find CINE a better investing option than RR.
Manika Premsingh 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.