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I was wrong about the Royal Mail share price. Here’s what I’d do now

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Royal Mail (LSE: RMG) is a stock I’ve been bearish on for a while. For example, in July last year, I said I’d “steer well clear” due to the fact hedge funds were betting the share price would fall. More recently, in early December, I said that if I owned Royal Mail shares, I’d be looking to sell.

Yet, over the last six months, Royal Mail shares have actually performed very well. Back in mid-July, the FTSE 250 stock was trading near 180p. Today, however, the share price is at 385p. That represents a rise of more than 110%. Clearly, my short-term calls on the Royal Mail share price have been wrong.

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Here, I’m going to look at why the RMG share price has surged recently. I’ll also explain how I’d play the stock now.

Royal Mail’s share price has surged

Since I last covered the stock in early December, when I looked at what had caused Royal Mail’s share price to rise 36% in November, there have been a number of positive developments here.

Firstly, Royal Mail has reached an agreement with its largest labour union. This is in relation to the company’s strategy, future direction, operational change, and pay. The agreement settles a long dispute between the parties and paves the way for the company to focus more on parcel deliveries going forward.

Secondly, the company has appointed a new CEO for its UK business. On 11 January, Royal Mail announced Simon Thompson will head this business. Previously, Thompson headed digital commerce at HSBC. He’s also held senior positions at WM Morrison Supermarkets, Ocado, and Motorola. 

Third, analyst sentiment towards the stock has dramatically improved recently. For example, just recently, JP Morgan named RMG as one of its ‘top picks’ within the European logistics sector. It noted trading has benefitted from stronger parcel volume, improving the medium-term revenue outlook. Meanwhile, Berenberg recently upgraded the shares to ‘hold’ from ‘sell’ while more than doubling its price target. It’s also worth pointing out that hedge funds are no longer targeting the stock.

Finally, sentiment towards cheap UK shares have improved this year now that there’s more clarity on Brexit. This will also have helped the Royal Mail share price.

My view on RMG shares now

Putting this all together, it seems the outlook for Royal Mail is certainly better than it was six months ago. The company has held up better than expected due to its parcel growth. And with a new CEO at the helm and a union agreement in place, there’s less uncertainty in relation to the investment case.

Having said that, this still isn’t a stock I’d buy today. There are a few reasons why.

One is that the company doesn’t have a good track record. I prefer to invest in reliable companies that are resilient and dependable.

Another is that Royal Mail still has a long way to go to fully turn things around. It needs to invest heavily in technology and become much more of a digital operator, while also reducing its costs.

Finally, the valuation doesn’t have much appeal. At the current share price, the forward-looking P/E ratio for next year is 14. I see the stock as fully-valued.

All things considered, I think there are better stocks to buy.

Like this one...

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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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