The thing with bubble stocks is that they’ve risen a lot, just like the Rolls-Royce Holdings (LSE: RR.) share price. And I mean a lot. It’s soared more than 10-fold since its 2020 lows. And it’s nearly doubled in just the past 12 months.
I see reasons to fear we could be in a bubble, with the price rise just one of them. Buying after everyone else is already in can be a path to disaster.
I’m also wary of over-enthusiasm. The trouble is, often nobody notices it before it’s too late.
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Bullish boss
Here we have CEO Tufan Erginbilgic, saying things like: “Our transformation of Rolls-Royce into a high-performing, competitive, resilient, and growing business is proceeding with pace and intensity.” That was at interim results time, when he was going on about “a relentless focus on commercial optimisation and cost efficiencies.”
That’ll just get more people piling in, won’t it? Pump that bubble. Even with November’s trading update, we had to listen to stuff about “a front-end-loaded delivery of profit and cash flow improvements” and that kind of cheeriness.
Yes, I know he’s lived up to his claims so far. And his upbeat words turn into positive results every time we get a new update. But that won’t convince a part-time pessimist like me.
Getting serious
You’ve probably guessed my negativity isn’t entirely serious. And I’m not getting on Mr Erginbilgic’s back. In fact, I’ve been seriously impressed by what he’s achieved at Rolls-Royce in the short time he’s been in charge. He seems like one of the best.
But there’s a serious side to this. And it’s based on years of experience of what can go wrong to dash investors’ hopes. I’ve just seen so many of them pump up their expectations, thinking their company is going to exceed them every single time.
Will Rolls-Royce some day manage just to hit its targets without going beyond them? Maybe it will, dare I breathe the words, fall slightly short of expectations? Or, horror of horrors, perhaps have to downgrade its outlook ever so slightly?
Off the boil
Something like that has happened to every single growth stock I’ve ever watched since I started in this investment game. And every time, a significant portion of its shareholders have run like the wind and down has gone the share price.
Now, there’s maybe a bit of poetic licence there too. And a growth spell can progress into a more mature steady period, with the company supported mainly by long-term investors with their eyes fixed on the far financial horizon. Those can be the best of times. And I can see such times coming for Rolls-Royce.
In the meantime, the stock’s valuation doesn’t scream ‘bubble’ to me. A price-to-earnings ratio dropping to 24 based on forecasts out to 2026 might be just fine. So we could be in for another good year, even if the share price might not double again.
On balance, I think it’s unlikely we’ll hear a loud pop in 2025. But I do see a decent chance we could be in for some fallbacks and better buying opportunities. I hope so.
