Having tumbled almost 30% in 2022 so far, the Rolls-Royce (LSE: RR) share price has now sunk back to below £1. Is it time to buy? Here’s my take.
Opportunity cost
One important question to ask is just what we mean by ‘recover’? This is not to disappear down some philosophical rabbit hole. However, if I’m to risk my capital on an individual company like this, surely it helps to have a rough idea about what I’m looking to achieve?
The problem with this approach, however, is that contemplating where a company’s stock may be going in the very near term is ultimately fruitless (and very un-Foolish). It simply isn’t possible to take into account the impact of so many potential variables. So, I’m looking at this in a different way.
For me, speculating on a recovery in the Rolls-Royce share price is actually less about what value it will hit and when. It’s whether the opportunity cost — what I potentially give up by investing in this stock over others — is worth it.
Multiple headwinds
It’s clear to me that the company still faces an unenviable number of hurdles in the road ahead. Covid-19 hasn’t yet left us, even though international travel has resumed. Back down on the ground, net debt has ballooned. That’s not ideal when you consider how capital intensive this business is.
The sudden departure of CEO Warren East is another thing the battered firm could do without. While generally managing to succeed in steadying the ship, the arrival of the pandemic has arguably impacted his ability to turn the company around. What this development does is create is more uncertainty, which could keep the Rolls-Royce share price down.
All this before the impact of the awful conflict in Ukraine on UK share prices generally is even considered. Whether investors are prepared or not, Rolls-Royce could do all the right things and still lose value if the situation escalates further.
Buy the dip?
Perhaps I’m being overly negative. With global travel getting back to some kind of normality, demand for Rolls-Royce engines is surely only going one way. There are also growth opportunities relating to the rise of nuclear energy that could prove very lucrative in time.
On the other hand, buying a slice of Rolls-Royce now would be to go completely against my investing approach of only buying the best stocks going. Based on measures of ‘quality’ — such as operating margins and returns on capital employed — the FTSE 100 juggernaut just isn’t an attractive proposition.
On top of all this, I’m being asked to pay 21 times forecast earnings for the stock. That’s steep, even if the valuation will likely come down as earnings (hopefully) bounce back. In the meantime, I’m not receiving any kind of compensation for my patience by way of dividends. This is in sharp contrast to many other stocks on the UK market.
Still not for me
I don’t know when the Rolls-Royce share price will ‘recover’. However, I suspect the journey back will not be without a few bumps that other FTSE 100 stocks can probably avoid.
Good luck to all those already holding but I’m still wary of taking a position here.
