Has it been a bad week for shareholders in Rolls-Royce (LSE: RR), watching the share’s bull run come crashing to an end? Not a bit of it! In fact, this week saw Rolls-Royce shares hit yet another all-time high, something that has happened repeatedly so far this year.
I think the share could potentially go even higher from here.
I have been sitting on the sidelines since I sold my Rolls-Royce shares at a much lower price than their current level. So should I reassess my logic and consider adding the aeronautical engineer back into my portfolio?
Ignoring the momentum
While I have missed out on the recent share price action, I am not fearful of missing out. I buy or sell shares based on what potential value I think they offer me at their current price, not based on what lots of other people are doing.
So while Rolls-Royce shares have had great momentum of late, that can change in an instant. Momentum can work negatively, as well as positively.
Therefore, if I buy a share it is not simply because of its current momentum – I base my decisions on what I see as the underlying fundamentals of the business concerned.
Here’s why I sold
At one point, obviously, I liked the underlying investment case for Rolls-Royce shares. In fact, I still do. After all, it operates in a market with high barriers to entry. It has considerable competitive advantages, including its proprietary engine technology, large installed base of engines and very well-regarded brand.
Those, combined with current management’s aggressive goal-setting and proven ability so far to deliver on those targets, are all attractive to me. They also make me think that, if things keep going well, the Rolls-Royce share price may potentially move up even higher from its recent all-time highs.
Why, then, did I sell? While I continued to like the underlying investment case (and still do), I thought the valuation had become unattractive. Specifically, I do not think it properly accounts for the risk of a sudden, unforeseen collapse in civil aviation demand badly hurting demand for engine sales and maintenance.
Was I wrong?
So far, that has not happened. Meanwhile, Rolls-Royce shares have gone from strength to strength.
If I had hung onto my shares, I would have made a lot more than I did. Even if I bought some today and that risk did not come to pass, I think I could potentially still do well.
So was I wrong to sell? Hindsight is a wonderful thing, of course, but I think my risk analysis was logical. Just because a risk has not come to pass does not mean it was not (or is not) still a risk. Indeed, that is precisely what makes a risk a risk – that element of the unknown.
That risk remains today and I do not think the current Rolls-Royce share price offers me sufficient margin of safety to mitigate it. So I will not be investing.
