Rolls-Royce shares are falling again, but they are hardly alone in that. Almost every other stock is falling right now.
At The Motley Fool, we believe a stock market correction like this one is an opportunity, rather than a threat. It’s a great chance to pick up our favourite stocks at a reduced price.
We believe in long-term investing. Once we have bought a bargain stock, we aim to hold for years. Rolls-Royce stock has taken a beating. Can it recover given time?
This FTSE 100 stock has fallen far
Rolls-Royce had a dreadful pandemic. As the world locked down and airline shares tumbled, the FTSE 100 jet engine maker suffered spectacular collateral damage. It generates revenue from the accompanying maintenance contracts, which are linked to miles flown. No flying means no revenues.
Bargain hunters swarmed over Rolls-Royce shares. Some banked a quick profit, others are sitting on a loss as the oil price rockets, driving up airline costs.
The Rolls-Royce share price is down almost 10% in the last week. Over five years, the shares have lost three quarters of their value. Investors who bought previous dips have had to wait a long, long time for vindication.
Yet still they swarm. Even though the dividend has gone, respected chief executive Warren East is leaving and Brent crude has hit $123 a barrel.
China has lifted Covid lockdowns but we could still get a third wave of the pandemic, which would hit flying again. Inflation is another threat. We have yet to see whether Rolls-Royce has pricing power, and can drive up its maintenance charges to match.
Buying Rolls-Royce shares during the current stock market crash is a big risk. Yet there are grounds for optimism, too.
Morgan Stanley reckons its stock has been underpriced, as its “earnings recovery is much closer than the market has priced in”. It says the company should also benefit from the next leg of a global aviation recovery.
I’d grit my teeth and buy Roll-Royce shares
Also, Rolls-Royce does have some inflation protection, through long-term sourcing agreements and hedging policies designed to limit raw material price volatility. Flying hours are climbing, too, up 42% in the first four months of this year. The cost-of-living crisis is hitting many people hard, but others still have cash to spend.
Rolls-Royce should also be boosted by its defence arm, which now has a massive order backlog as war fears spread. Civil Aerospace has a long backlog, too. Its engines are still in demand.
So yes, I would grit my teeth and buy Rolls-Royce shares on the current dip. Then I would hold them for what could be a long, long haul.
