Barely a week goes by without engine-maker Rolls-Royce (LSE: RR) shares hitting the ‘most popular buy’ lists among brokers such as Hargreaves Lansdown.
Unfortunately, popularity does not necessarily equate to a great investment. That’s certainly been the case here in 2022.
Big loser
As I type, Rolls-Royce shares have tumbled 38% year to date. In other words, I’d have £620 remaining from an initial investment of £1,000. Ouch!
Actually, I’m ignoring the costs of buying here. So the result is actually a little bit worse. I’m also ignoring the positive impact of dividends because, well, there haven’t been any dividends from Rolls over this period (or for many years).
This performance suggests there’s little for me to like. But is this true?
More than a one-trick pony
I’m not sure it is. Rolls-Royce is a huge, well-established company with a global reach. Although its primary source of earnings comes from the civil aerospace sector, it’s also got its fingers in a few other pies. This gives it a degree of earnings spread.
In fact, it’s this diversification that could end up playing a large role in the company’s revival. One of the key takeaway messages from 2022 so far is that nations must be on guard from bad actors and despots. Accordingly, the invasion of Ukraine will likely see nations looking to increase their defence budgets. Seen purely from an investment point of view, the latter should be good news for the £7bn-cap.
Another thing I like is that there isn’t too much short interest in Rolls-Royce shares, at least relative to disasters like Cineworld. Naturally, this situation can always change.
Reality bites
Despite the points just made, I am struggling to see the investment case here as compelling. As great as it is to see Covid-19 in retreat and demand for travel back with a bang, the sustained rise in prices seen over 2022 could act as a significant headwind.
Not only must airlines contend with higher fuel costs and staffing problems, but passengers must also wrestle with the cost-of-living crisis. Ultimately, this probably means lower demand for Rolls products and services, at least for now.
On a more fundamental level, the FTSE 100 member doesn’t have the quality hallmarks that I seek. Returns on the money that management has put to work, for example, have been consistently woeful. That matters to me because it’s performance on this metric that will help to compound my own capital over time. Just ask Warren Buffett.
My verdict on Rolls-Royce shares
This is not some binary biotech bet or risky oil and gas venture but a world leader at what it does. At face value, the share price slump appears a wonderful opportunity.
To be clear, I do see this company recovering in time. However, I suspect the upside from here will be impeded by the eye-watering debt it already carries. Moreover, I’m not even being paid any income for waiting. I reckon that makes the opportunity cost of not investing elsewhere pretty high.
I may live to regret not buying but Rolls-Royce shares (still) aren’t for me.
