In the stock markets, especially during uncertain times, I think it is safe to say that we can expect the unexpected. What else explains massive increases in these two closely watched shares yesterday? The first of these is FTSE 100 stock Rolls-Royce (LSE: RR). It was a star performer in the trading session, up by a little over 10%. And the second was the FTSE 250 cinema chain Cineworld (LSE: CINE), which was up by 12%.
What’s going on here? And more importantly, can these increases be sustained?
Good news for Rolls-Royce
As far as Rolls-Royce goes, there are not one but two developments that have resulted in a run up in its share price. The first is that it has just a won a US Airforce contract to supply engines. This could be worth up to $2.6bn, news reports say. It has also struck a deal to sell ITP Aero, its Spanish unit, to a clutch of investors led by Bain Capital. As part of its restructuring, the company had decided to get leaner with a disposals target of £2bn. This has now been achieved.
This is great news. And in fact, it is in line with my prediction for the stock. Last month, I had made a case for a rise in the Rolls-Royce share price based on the fact that it is trading at a lower multiple than that for the FTSE 100 index as a whole. My assessment was that it should rise to around 140p. Yesterday its share price was even higher at 146p.
Cineworld continues to improve on better prospects
There is no such clear reason for Cineworld’s share price rise though. The stock has been gaining momentum for some time, and the latest increase is possibly a continuation of that. Since mid-September, it is up more than 30%. One reason is the improved outlook for movie theatres as there are big budget releases lined up for the coming months. In fact, as I had outlined in my article on it last week, the Cineworld share price started rising pretty soon after bookings opened for the next James Bond film, that is due for release at the end of this month.
FTSE 100 and FTSE 250 cyclicals gain
More generally, it was a good day for Covid-19 impacted stocks. Across both the FTSE 100 and FTSE 250, the biggest gainers today were travel-related stocks and other cyclicals, like Cineworld. This could have something to do with improvements in coronavirus numbers in the UK, that are encouraging after a spike in figures recently.
What I’d do
Nevertheless, I would refrain from investing in stocks based only on this latest trend. I see promise in Cineworld stock and have already bought it a while ago. It has fallen a lot, which means that there is plenty of upside to it as cinemas start recovering, even if it takes time. For Rolls-Royce, I am in wait-and-watch mode. The stock has potential, but I want to see it turning profitable sustainably before buying it for the long-term.
