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Why I believe the Rolls-Royce share price will take off in 2021

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The Rolls-Royce (LON: RR) share price was officially one of the worst-performing stocks of 2020. Shares in the aerospace company fell by more than 50% in what had been one of the worst years in its long history.

For a few months, it was touch and go. There was even talk of nationalisation at one point. Management had to work flat out to secure a refinancing plan to help the group weather the storm.

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Luckily, they succeeded. The group is now well-financed and costs have been cut. I believe this puts it in an excellent position to stage a recovery in 2021. 

Rolls-Royce share price: primed for growth

Rolls’ problems have one root cause, the global pandemic. Unfortunately, it looks as if the coronavirus crisis will continue for at least the next six months. 

However, there are green shoots on the horizon. A vaccination programme is well underway in the UK and the United States, and doctors are becoming much better at treating the illness. 

This suggests there’s an end in sight. Nevertheless, it may be several years before the aviation market returns to levels of activity last seen in 2019. Still, the industry appears to have stabilised, which is good news for the Rolls-Royce share price, in my opinion. 

I believe the company’s current share price already reflects much of the bad news in the aerospace industry. As such, I reckon it’s unlikely the stock will return to the lows seen in October of last year. At that point, the group was scrambling to raise funding to keep the lights on. 

And as the share price already reflects much of the bad news facing the sector, I reckon any improvement will have a significant impact on a Rolls-Royce share price. To put it another way, when the company’s sales begin to improve, I think the stock could quickly rise in value. 

Ready for take-off

With that in mind, I’m cautiously optimistic on the outlook for the Rolls-Royce share price in 2021. Even a slight improvement in the firm’s fortunes could produce a large capital gain for shareholders. For example, if an investor bought the stock today, and it returned to levels seen at the beginning of 2020, they’d see a capital return of around 120%. 

As well as this potential for capital growth, the Rolls-Royce share price also has a limited downside, in my opinion. As noted above, the company has enough money to keep the lights on for the foreseeable future. What’s more, group sales and cash flow figures are steadily improving. 

Therefore, as a recovery play on the global economy, I think it could be worth me taking a closer look at the Rolls-Royce share price. I reckon the stock’s potential reward more than compensates for the risk of buying at current levels.

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Rupert Hargreaves 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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