A year is a short time on the stock market, as any look at the Rolls-Royce Holdings (LSE: RR.) share price shows.
The company has been a real star of the recovery since the Covid pandemic. And in the past 12 months, the price has climbed by 170%.
FTSE 100 growth star
That’s enough to turn £10,000 into £27,000. Growth stocks like that don’t come along too often. And it rarely happens with a FTSE 100 stock.
These blue-chip firms are supposed to be mature and dull, aren’t they? They’ve mostly settled down to modest growth, and steady dividends year after year.
Well, obviously, a crisis like the 2020 stock market crash can turn that upside down. All bets are off, and we can find big winners and losers just about anywhere.
Key lesson
I take a lesson from what’s happened to Rolls-Royce. Part of it is that we should never panic just because a stock falls.
Whatever’s going on, selling just because that’s what everyone else is doing has to be a poor move. And the same goes for buying just because everyone else is piling in.
No, even in crisis times, we need to keep cool heads and stick with a careful look at a stock’s fundamentals.
That means I try to buy or sell based only on how I see a stock’s long-term prospects.
Hard to do
Now, that’s easy to say. But I do find it hard to keep my mind clear of the bust and boom of the past few years.
Still, I try to do one thing, and ask myself one question. What if Covid had never happened, if the Rolls-Royce share price didn’t crash, and didn’t need to climb back the way it has.
What if it just went in a straight line from February 2020 to now? And if broker forecasts were still exactly as they are today.
Valuation
We’d be looking at a 29% share price rise over five years, which is still fair.
But going back over 10-years, there’s a gain of only 7%. The FTSE 100 managed 17.5% in that time, which itself is pretty poor.
That soaring 12-month winner doesn’t look so great now. It looks more like a 10-year loser.
If I’d put that £10,000 in Rolls-Royce shares a decade ago, it would be worth just £10,700 today. Well, plus dividends. But they were weak even before Covid brought them to a halt.
What now?
What might £10,000 in Rolls-Royce turn into in the next 10 years? We can only look forward. And forecasts show strong earnings growth for the next three years.
The forecast price-to-earnings (P/E) ratio for 2024 is up at 28, more than twice the FTSE 100 right now. It could drop below 20 by 2026, though. And net debt is down to only £2bn now.
What about the next 12 months for the Rolls-Royce share price? It might be good. But I don’t expect another 170%.
