My only regret about buying Rolls-Royce (LSE: RR) shares on 1 November is that I didn’t buy more of them. They’ve been an instant smash hit in my portfolio, rising 26.19% in just over two months.
I spent several years dithering over whether to buy the shares, and in retrospect I’m glad I didn’t buy earlier. They’ve suffered an ignominious slide for some time, falling 18.51% over one year and 65.1% over five years.
So glad I bought when I did
Last autumn, I decided the sell-off had been over done, and swooped. Of course, two months tells me very little. Whenever I buy shares, my time frame is 15 to 20 years. I’m not a trader, but a long-term investor.
So I’m not considering banking my good fortune and moving on. Quite the reverse. The question is whether I buy more Rolls-Royce shares, rather than sell the ones that I have.
Rolls-Royce has flown on the back of a wider FTSE 100 recovery. Over the same period, the index climbed 7.32% from 7,186 to 7,712. Sentiment is improving across the board, as investors anticipate peak inflation and lower interest rates by the end of the year
I imagine that many of them will have targeted Rolls-Royce, precisely because it sold off more than most in the slump.
There’s also been some good news coming out of the company. Two days after my share purchase, Rolls-Royce published annual guidance suggesting that cash flows had held firm through the year’s market turmoil and inflation.
The company makes aircraft engines and gets paid on a miles-flown basis, thus benefiting from the post-Covid travel industry recovery. That’s good news but the recovery remains at the mercy of Chinese Covid issues and a global recession.
Demand has also been hit by the inflation shock, although many of its long-term contracts contain inflation-linked pricing clauses. Guidance was unchanged, which in these troubled times is seen as a mark of success.
FTSE 100 value stock
Rolls-Royce shares were handed a further boost by Barclays analysts claiming that the stock is a “value unlock”, and a big contract win from the US military to replace the Black Hawk utility helicopters.
The company’s plan to pepper the UK with 30 small-scale nuclear reactors has also captured the imagination.
Rolls-Royce still has a long way to go, especially with nuclear. It pays no dividend, and its profit margins are thin at just 4.7%. JP Morgan recently noted that net debt is around £15bn once you include customer advances, pension liabilities, money owed to joint ventures and cash provisions, making the balance sheet “very weak”. It set a share target share price of 70p, which worries me given that the stock currently trades at 103p.
I’m delighted to have bought Rolls-Royce, but I’m in no rush to buy more at today’s price. Instead, I will go hunting for other under-priced opportunities and leave my current stake to prove its worth.
