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Will Rolls-Royce become a penny stock again?

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

Rolls-Royce (LSE: RR) stock had a really good run in the last quarter. In July, it was in penny stock territory. It had pulled out from those levels as the stock market rally of November 2020 began, after it had crashed as the pandemic began. By the end of September this year, the stock was flying, trading at 140p+.

It remained fairly elevated until recently, but last Friday was a disastrous day for it. The stock tanked by more than 11% as the Omicron variant impacted investor sentiment. It is now closer to 120p. This to me, raises the following question. Could it return to penny stock status again?

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Why did the Rolls-Royce share price crash?

But first, why did the shares fall so much? After all, the FTSE 100 index fell by ‘only’ 3.6%. As I see it, there are two things to note here. First, by FTSE 100 standards, even 3.6% is a huge fall. It is the biggest one in 20 months. The last time it fell as much was at the start of April, 2020, which was shortly after the stock market crash of 23 March, 2020. At the time, there was still much uncertainty about how long the pandemic would drag on. It is possible that investors view the current situation similarly.

Next, the Rolls-Royce share price fell far more as it is closely linked to travel. And travel has been one of the worst affected industries because of Covid-19. It is little wonder that the shares recovered only a little in Monday’s trading.

And from what I can figure out so far, the variant could continue to keep the markets uncertain for the near future as well. This in turn could impact the Rolls-Royce share price. I believe that if news continues to get worse, it is possible that the stock would indeed revert to penny stock levels. 

The balancing factors

However, I think there could be balancing factors as well. In less than two weeks from now, the company releases its trading update. Since it has made some strong strides in the last quarter, I expect this to be more positive than not. Importantly, it has been able to meet its disposals target. Also, it has been signing new contracts, which might show up in its revenues. Its last results were also positive, which is encouraging too. 

And in any case, it is possible that the spread of the Omicron variant might be controlled soon. So on balance, I think there are factors that could keep its share price bmore uoyant. 

Would I buy the stock?

The critical question for me is whether I would buy the stock. To that, I would only say that I am encouraged by the positive developments for the company. However, I would have liked to see at least one more quarter of profits before deciding on whether or not to buy. And now my wait-and-watch time might have to be extended because of the latest developments on Covid-19. As before, it stays on my watchlist for now. 

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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.

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