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Why the Rolls-Royce share price fell in October

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A Rolls-Royce employee works on an engine
Image: Rolls-Royce

At the end of September, the Rolls-Royce (LSE:RR) share price closed at 140p. Given the close last month at 132p, this represents a fall of just over 5%. This isn’t the end of the world, with the shares up 87% over a broader one-year period. Yet if I’d bought any shares at the start of October, I’d want to know what had been going on. So here’s some more information on what happened last month.

A small fall when looking at the bigger picture

The first reason why the Rolls-Royce share price fell last month is just to do with the timeframe captured. Back in the middle of September, the share price was trading around 105p. It then went on a strong rally in the back end of September, peaking at 147p during the last week of the month. 

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So the stock was already entering October having seen a strong push already. After a large move higher in a short space of time, stocks do tend to retrace slightly and consolidate. This means that the price level tends to move sideways as investors catch their breath after a move and decide whether the next move will be higher or lower.

The bottom line here is that October was a consolidation period for the stock after the rally in late September. So although the price did actually fall a few percent, it needs to be looked at in a slightly longer-term context.

Less optimism around travel

Another reason why I think the shares fell is the unfulfilled optimism regarding the loosening of travel restrictions. In September, the share price jumped thanks to a simplification of the UK traffic light system for international travel. Added to this were plans to make it easier and cheaper to test travellers entering the country. In the US, it was confirmed that vaccinated passengers would be able to travel in from the EU and UK from November onwards.

Given that Rolls-Royce is indirectly tied to the fate of the travel industry due to the commercial aviation arm it operates, all of this news sounded good. Yet since then, the good news hasn’t really held up. Here in the UK, Covid-19 infections and hospitalisations have risen over the past few weeks. There’s still speculation around restrictions heading into the winter. This would clearly inhibit travelling abroad to some extent. 

Therefore, I think some pessimism is being priced into the Rolls-Royce share price to reflect this view. 

Where the Rolls-Royce share price could head from here

Clearly, the next year is very important for the company. It’ll dictate whether the recovery from the large loss in 2020 can be continued, and if the business can push forward with the transformation. I think some of this will be out of the hands of the management team. Rather, it’ll depend on how international travel performs, related to Covid-19.

I personally won’t be buying RR shares right now. For a more in-depth look at the bull vs bear case on the stock, a great piece from The Motley Fool team can be read here.

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jonathansmith1 and the The Motley Fool UK have 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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