One of the great turnaround stories among large listed UK companies over the past few years has been aeronautical engineer Rolls-Royce (LSE: RR). Rolls-Royce shares have repeatedly hit new all-time highs this year. The share price chart shows how stunning the performance has been over the past five years.
However, I do not own Rolls-Royce shares in my portfolio and currently have no plans to change that. Here are three reasons why.
Share price matters when investing
It is easy to look at a company and imagine it would be a great investment. As an example, Rolls-Royce has a lot going for it. The market for civil aircraft engines alone is large and likely to stay that way over time. The same is true for other areas in which Rolls operates, such as defence and power systems.
The barriers to entry are high as a lot of expertise is required. That means that competition can be limited, giving Rolls-Royce pricing power.
None of that necessarily means that Rolls-Royce shares would be a great investment for me right now however. There is a difference between a great business and a great investment. To be a great investment, the company needs to be selling for an attractive price.
At the current price, Rolls-Royce shares look pricey to me.
Risks can be substantial
That does not mean I see no potential for the shares to rise even further from here. As its recent results demonstrated, Rolls-Royce is performing strongly as a business right now. Indeed it even raised its financial performance targets for the full year.
However, like any business, it faces risks. Some of those are substantial, but fall outside the firm’s control. Civil aerospace engine sales and servicing remain a key part of the overall business. But demand can drop suddenly overnight, as we have seen repeatedly in the past.
If a terrorist attack, pandemic or war sends passenger numbers tumbling in short order, that could be very bad for Rolls-Royce’s profitability – and its share price.
I do not think the current price offers me a sufficient margin of safety to mitigate that risk.
An investor can only do so much
There is another practical reason I do not own Rolls-Royce shares right now, even though I have repeatedly weighed the pros and cons of buying them in recent years.
With just a small amount of money to invest, an investor can only do so much.
There are lots of opportunities – indeed, in the current market I reckon there continue to be some excellent potential bargains that may yet perform well just like Rolls-Royce shares have done in recent years.
But most of the money I want to invest is already invested right now. For the spare cash I have, there are lots of opportunities competing for my attention. Like any small private investor, I have to make choices as I cannot take advantage of every potentially good opportunity I see in the stock market.
When weighing risks and potential rewards, Rolls-Royce today looks less attractive for my portfolio than some other shares.
