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The Rolls-Royce share price is falling again. Here’s what I’d do

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November was a relatively good month for Rolls-Royce (LSE: RR) shareholders, who saw their investment pick up a little. I say relatively, because the Rolls-Royce share price has still collapsed in 2020. And the November optimism has already started to wane.

Rolls-Royce shares had already started to wobble a bit before the firm’s 11 December trading update. But the latest news did push them down further.

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It was all about how terrible 2020 has been, about what Rolls is doing to survive the storm, and what the outlook is like. On the latter, I was struck by one particular comment: “We continue to expect the group to turn cash flow positive at some point during the second half of 2021.”

The company continued with “Our target to deliver at least £750 million free cash flow (excluding disposals) as early as 2022 is also unchanged.

That 2022 target seems upbeat. But late 2021 for a return to positive cash flow could turn people away. Now, there’s nothing really new here, so why was there an impact on the Rolls-Royce share price? Perhaps it’s the slightly higher free cash outflow the company now expects for 2020? But to counter that, I’d have thought the rolling out of the Covid-19 vaccine should provide a boost for the Rolls-Royce share price.

Rolls-Royce share price movement

I don’t think the current share price movements mean anything at all really. But they do remind me of one thing I’ve learned from my long-term investing approach. The big investing institutions almost never have their eyes on what truly counts. And Rolls-Royce looks like a clear example. It’s the long term that matters most, with the medium term over the next couple of years perhaps determining when the turnaround will come.

That’s filled with uncertainty, and the City doesn’t like uncertainty. So instead, investment managers huddle around the latest short-term figures and over-analyse them. And they respond by buying or selling Rolls-Royce shares now, at today’s share price, when that possibly bears little relation to the company’s long-term prospects.

I can picture these folks plugging the latest minor changes to figures into their complex financial models and waiting for it to spit out a share price expectation. If it’s currently lower than that, buy. If it’s higher, sell. Can things really work like that? Either way, I firmly believe one thing. Any predictive calculations done now will be based on massive uncertainty and will provide very poor precision for forecasts.

Where will the shares go next?

I try not to focus on the wrong thing. That means I do not prioritise the Rolls-Royce share price. What counts is the company itself. Thankfully, the Rolls management does appear to be looking at the long-term future of the business. It is exactly what I’d expect, as I’ve always considered Rolls a very well managed company.

I expect Rolls to survive. But, no matter what confidence I have in a firm’s management, I won’t buy if the financial situation is bad. I see far less risky investments out there.

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Alan Oscroft 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.

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