Ten days ago, I wrote an article about the Rolls-Royce (LSE:RR) rights issue. You can read that here. I discussed how the Rolls-Royce share price could continue to be under pressure due to the implications of it needing to raise billions of pounds.
It showed that the firm needs liquidity fast, in a sector which is underperforming. The new shares were being offered to existing investors at 32p, which was a steep discount from the price of around 104p when the news broke. This was seen as a low price to encourage a large take-up, ensuring the firm could raise the needed funds.
A week can be a long time in the markets, and last week was a golden example. The Rolls-Royce share price went on an incredible rally, to finish the week at 223p. This almost doubled the price at which it started Monday. So is it now worth jumping on the bandwagon and buying for my ISA?
A share-price reversal
There were several reasons why the Rolls-Royce share price bounced back strongly last week. Firstly, investors had the weekend to digest the rights issue news. Although I maintain this to be a negative scenario, many investors clearly saw it as a positive. You could argue that Rolls-Royce is successfully raising new capital, helping it to survive a difficult period.
The share price also benefited from the news that Heathrow is a trial airport for a new Covid-19 ‘passport’. It’s essentially an app that holds a certified Covid-19 test status on it, allowing passengers to travel without quarantine restrictions. It might not be the finished product, but it at least could make flying more accessible. Due to the fact that Rolls-Royce has a large exposure to the aviation industry, this was an indirect boost for the firm.
An article in the Financial Times also reported that the UK government is considering a £2bn investment into mini-nuclear reactors. Rolls-Royce has experience in building similar power plants. Given that the firm already has close ties with the government, it’s logical to think some of this work could be contracted out to the firm. This kind of project could be very profitable, hence the Rolls-Royce share price rallying last week.
Time to buy in?
Despite the posivitty regarding the above points, I’d still stay away from investing right now. The outlook for the firm remains negative in the short term, in my opinion. Even with the huge rally, the Rolls-Royce share price is still down 68% year-to-date.
More speculative investors may disagree and feel it’s worth an investment for the long term. If you do feel this way, make sure to buy the stock within an ISA. Should the share price eventually recover its losses, then the ISA wrapper will ensure that you keep all of the profit. Without it, you could be facing a hefty capital gains tax bill.
From my point of view, I’d be looking elsewhere for better value stocks. For example, I think the oil sector is due a turnaround, so would look to buy stocks like BP and Royal Dutch Shell.
jonathansmith1 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.