The FTSE 100 did not perform well last year. Despite enjoying positive growth in the years immediately following COVID-19, it struggled through 2023. Risk-averse investors tend to rely on the stable returns of indexes like the FTSE, but last year it failed them. With it now down 3.3% in the past 12 months, market participants are feeling the squeeze.
However, there are a few standout stocks that did perform well in 2023 and I’m eyeing one that completely broke the mould.
The car company that took flight
Rolls-Royce (LSE:RR.) was the best-performing FTSE 100 share in 2023, up an incredible 190% in the past 12 months. On 19 January 2023, Rolls Royce shares were selling at just above £1. Now, they’ll cost you a pricy £3.06 per share.
Buying 500 shares a year ago would have cost a mere £500, but would be worth almost £1,500 today. That £1,000 may not seem a lot, but you’d struggle to get better returns in a year from any other type of investment. The question is, can Rolls-Royce keep delivering this kind of return year on year?
Much of the company’s revenue comes from manufacturing aircraft engines. Its success in 2023 was likely driven by an increase in post-pandemic air travel, which may continue through 2024.
Recently, Dubai-based airline Emirates raised concerns regarding the durability of its Trent XWB-97 jet engine. Allegedly, the engines struggle to perform in ‘hot and sandy’ conditions, requiring costly additional maintenance. I wonder if this small issue could be enough to bring Rolls-Royce’s spectacular growth to a grinding halt.
Is now the time to buy?
Despite its excellent reputation and track record of reliable performance, I have some concerns about Rolls-Royce shares. These were recently echoed by German bank Berenberg, which downgraded the shares to ‘sell’ on 16 January. The broker feels the recent engine concerns could spell trouble for the company, stating: “If history is a guide, this is the kind of issue that can derail medium-term margins for companies in the jet engine business.”
I also feel the stock may have ventured into overbought territory. With a share price that’s risen so high so quickly, I assume that buying power is near exhaustion. However, I may be proven wrong. Analysis from a range of different sources puts Rolls-Royce shares at an average 60% below fair value, with revenue forecast to grow at a moderate 5.7% per year.
Growth vs. value
If I were looking for shares to provide quick returns, I’d want to get in as cheap as possible on a stock with lots of room to grow. Value investors prefer to look for shares that exhibit intrinsic value relative to price. These tend to grow slowly over time but offer less risk and more stability.
Currently, Rolls-Royce may not fall under either category. Although it undoubtedly holds intrinsic value (based largely on its excellent reputation), the stock may be on a precipice after such rapid growth. While it might still have some gas in the tank, I think it’s running out of blue sky to ascend further.
