Financial markets always operate on the spectrum of greed and fear. It’s rare to see wide swings from fear to greed or vice versa in a short span of time. This is, however, clearly visible right now in the broader markets. It’s even more so in specific cases. The letters and parcel delivery service provider, Royal Mail (LSE: RMG), is a perfect example of this.
As the worst of the stock market crash ensued in late March, the Royal Mail share price was hit badly. This was doubly so because it suspended its dividends. It fell to an all-time low as the news hit. RMG’s share price had been tumbling for the last couple of years in any case. This coincided with CEO Rico Back’s term, which was marked with all sorts of challenges.
Upswing in Royal Mail share price
However, better times were in store for the Royal Mail share price. Last month, Back stepped down, resulting in a sharp increase in price. By this time, the FTSE 100 index had already gained momentum. In other words, the investor mindset had shifted from fear towards greed, albeit with a fair bit of caution thrown in. An increase in the Royal Mail share price followed. But if the shift had only just restarted then, it’s in full swing now. At its close on Monday, it was at a four-month high. This is a 53% gain from the lows it touched just two months ago.
It’s true that there’s some cause for cheer. There’s been an increase in parcel delivery in the UK during the lockdown, as per RMG’s own research. Recessions are normally bad times for cyclical companies. Royal Mail is one such. But, in the Covid-19 driven lockdown, we quickly became dependent on deliveries. As a result, it ended up gaining somewhat despite the recession. Further, its research also points to the fact that post-lockdown, online shopping activity could increase.
Also, the group is restarting deliveries of standard letters on Saturdays from this week onwards. These had been stopped during the lockdown. This will also be a positive for the group’s revenues.
To invest, or not?
These developments are encouraging. But they aren’t enough to make a convincing argument for investing in RMG, to my mind. The Royal Mail share price has been hurt for a host of reasons, of which the coronavirus crisis was just one. It might be tapering, but others still exist. I’m talking about the future of its worker-management relations. Moreover, RMG’s present CEO is only an ‘interim’ one. And last but not the least, its financial health looks challenged.
In light of this, I’m finding it hard to explain the extent to which the Royal Mail share price has gained recently. Without meaning to offend any investors, it appears a lot like ‘irrational exuberance’, as they say in financial markets terminology. It’s driven by relatively little to cheer about, when there’s still much to be worried about. I’d wait for more signs of turnaround before investing in RMG at this point of ‘greed’ in the investing spectrum.
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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.