There is – as Theresa May once told us – no such thing as a magic money tree. But Rolls-Royce (LSE:RR) shares have been a pretty good substitute for investors over the last 10 years.
The stock is up 165%, which is enough to turn a £1,000 investment into £2,644. To say the path has been bumpy is an understatement, but there’s an important lesson here for investors.
Down… then up
Most investors know that Rolls-Royce is a highly cyclical business. Demand for air travel isn’t the same every year and the company’s revenues and profits also fluctuate.
Covid-19, however, demonstrated just how dramatic these shifts can be. Any business can have unusually low sales in a particular year. But the effect of the pandemic was much greater than this.
The company’s long-term debt doubled and its share count increased by more than 50%. As a result, the share price fell 88%.
Those are genuine issues, so investors wouldn’t have been entirely unreasonable in thinking about selling the stock. But for those who didn’t, the returns have been more than worth it.
Resilience
The cyclical nature of Rolls-Royce’s business can be a risk. But it’s also not an accident that both the share price and the company have recovered strongly since the end of the pandemic.
While the macroeconomic situation can be disruptive, the firm has some important competitive strengths. And these are what come to the fore over time.
The most important of these are the high barriers to entry associated with the aerospace and defence industries. These make it very difficult for new competitors and create pricing power for Rolls-Royce.
This means the company always has a chance over the long term. As long as the company stays afloat and demand recovers eventually, there’s a strong probability it can do well in a recovery.
Investing lessons
One lesson to take from the performance of Rolls-Royce shares over the last 10 years is that being greedy when others are fearful can pay off in a big way. But there’s something else to note as well.
A decade ago, Covid-19 wasn’t even on the horizon. If investors had been able to see into the future and the disruption to travel demand, they might well have thought twice about buying the stock.
Despite this, things have worked out very well for anyone who bought the stock back in 2015. And this is a good illustration of one of the most important principles for investors.
Over the long term, finding an exceptional business matters more than an accurate macroeconomic forecast. I think Rolls-Royce shares over the last 10 years have been a clear demonstration of this.
Still a buy?
The shares are up over 600% in the last five years. And other things being equal, it’s obviously better to buy a stock at a lower price than a higher one.
Nonetheless, the company’s long-term strengths still look firmly intact to me. So I think the lesson of the last 10 years should be that it’s still worth considering by investors.
