There’s no two ways about it, the Rolls-Royce (LSE:RR) share price has been booming lately. Anyone who bought the stock at the start of the year could sell it today for a 50% gain.
That’s a big return for an investment of just over two months. But after a significant jump in the share price, is it time to lock in the gains and sell Rolls-Royce shares?
A business on the up
Rolls-Royce is a business that suffered mightily during the pandemic. But as the world reopens, there have been a number of positive catalysts for the company.
As global travel recovers, things are looking more positive. Orders are back up, cash flow is positive, and the company managed to repair some of the damage to its balance sheet by selling off ITP Aero.
On top of that, the company’s new UltraFan engines look promising both in terms of performance and environmental impact. This could give Rolls-Royce a big edge going forward.
There’s a lot to like here and the company is moving in a good direction. But is the jump in the stock an overreaction?
Lasting damage
The Rolls-Royce share price has made a lot of progress back to where it was in 2019. But there’s reason to think the last part of the journey will be the hardest.
One lasting impact of the company’s survival moves during the pandemic is the shareholder dilution. In order to stay afloat, the business increased its share count by around 50%.
This makes it that much more difficult for Rolls-Royce shares to be worth what they once were. The company’s remaining debt will take some time to bring down without further asset sales.
Furthermore, airline capacity is now within 12.5% of its 2019 levels. That means that the tailwind coming from air travel volumes increasing is close to running out.
Buy, sell, or hold?
I don’t own Rolls-Royce shares in my portfolio and I don’t see myself buying the stock in the near future. The business still looks risky and the share price isn’t cheap enough to offset that.
The cash-intensive nature of the business, combined with the amount of debt it still has is enough to put me off. But if I already owned the stock, I wouldn’t sell it yet.
At the start of the year, the share price was around 99p. With the company improving, if I’d bought shares at that price, I’d probably hold on and see how the business develops.
If I owned Rolls-Royce shares, I’d be looking to follow Warren Buffett’s example. The Berkshire Hathaway CEO has a reputation for holding onto investments in good times and bad.
At £1.50, the stock looks both too expensive to be a buy and not expensive enough to sell. I’d see it a a stock to hold and wait to see what happens next.
