Rolls-Royce (LSE: RR) shares just won’t stop. They’ve climbed again over the last week, even though the FTSE 100 rally finally went into reverse.
The Rolls-Royce share price even smashed US tech hero Nvidia over the last year. It’s up 202.58% in that time, while the US chip maker trailed at 184.36%.
As with any rally, the real benefits have fallen to those who got in early. If I’d invested £10,000 in Rolls-Royce shares two years ago, I’d be bringing my retirement date forward by a year or two. The stock has skyrocketed a scarcely believable 418.93% in that time. My £10k would have grown fivefold to £51,893.
It’s a ‘superstock’
I did invest a much smaller sum on October 2022, put not enough to transform my pension planning. [Note to self: put more money where your mouth is next time].
Momentum stocks like this fill me with a mind-altering cocktail of FOMO (fear of missing out) and greed. I’ve learned to approach with caution, because nothing lasts forever.
Like many, I expected the Rolls-Royce share price to have started falling by now. Yet the good news continues to roll in. On 23 May, transformative CEO Tufan Erginbilgic declared a “strong start” to 2024 despite industry-wide supply chain issues.
The aircraft engine maker has been paying down debt, boosting its credit rating, widening margins, improving contracts, and strengthening its balance sheet. Erginbilgic remains a lucky general, as long-term service agreement large engine flying hours return to pre-pandemic 2019 levels on his watch.
Its Defence arm has been winning contracts, with the Australian AUKUS submarine programme using Rolls-Royce reactors. The Power Systems division is growing too, driven by higher demand from artificial intelligence (AI) and cloud services providers
FTSE 100 FOMO
Erginbilgic isn’t letting up. However, any investor hoping for another 400% growth spurt needs to settle down. Rolls-Royce shares snapped back after being oversold. The danger is that today’s FOMO-fuelled rally means they’re overbought instead.
It’s inevitably pricier than the average FTSE 100 stock, trading at 31.9 times forward earnings for 2024. If performance falls short of today’s high expectations, the stock could get an overnight rerating. Markets are banking on a dividend too, after years when it paid no income. The forecast yield is 0.6% but that should grow over time. I’d love to add Rolls-Royce to my portfolio, but can’t bring myself to do it today.
From here, the short-term chance of price growth is surely limited. Price drop risks, by contrast, are growing. That’s inevitable, given its outrageous success. I think the long-term outlook’s strong. I’m still keen to buy the stock, just not at today’s price.
If Rolls-Royce shares dip, I’ll buy with the intention of holding for years and years. If they don’t, I’ll just have to accept that I’ve missed out, and look for the next juicy FTSE 100 recovery play instead.
