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Tuesday, March 9, 2021

The Rolls-Royce share price: have we seen the bottom?

Finance The Rolls-Royce share price: have we seen the bottom?

Unlike many UK stocks, the Rolls-Royce (LSE: RR) share price didn’t hit its lowest value during the market crash roughly 11 months ago. In fact, it wasn’t until October 2020 that the valuation hit rock bottom.

Since the shares now appear to have settled around the 100p mark, is it now possible to say the company is through the worst and the only way is (slowly) up? And having avoided the shares like the plague since the pandemic first arrived, should I now throw caution to the wind?

Here’s my take.

Reasons to be optimistic

Naturally, the direction of the Rolls-Royce share price will likely be influenced to a great degree by what happens next in the pandemic. So, let’s look at the reasons for being optimistic on this front.

The recent drop in infection levels and successful vaccine rollout raises the hope of international travel resuming. Indeed, Boris Johnson stated yesterday that 17 May has been selected as the earliest possible date for this to happen. That’s still a long way away off. But the mere mention of a date should be sufficient to get holidaymakers (and investors) excited. This will likely boost the share prices of listed airlines like IAG, Ryanair and easyJet. One would assume Rolls-Royce will experience a similar uplift by association.  

Another reason for thinking the shares may continue ascending in the months ahead is that plenty of my fellow UK investors seem bullish. Rolls-Royce was the fourth most popular buy on investment platform Hargreaves Landsdown last week. In fact, the only companies more in demand were those offering exposure to Bitcoin and the budding medical cannabis sector!

On the other hand…

Of course, the road ahead may still prove rocky for Rolls. While Boris Johnson has stated that the lifting of restrictions would be “irreversible” this time around, he’s also made it clear the coronavirus data must satisfy four tests at all stages of his roadmap out of lockdown. There’s no guarantee this will be the case.

As much as I hate to say it, I think the emergence of a new, deadlier variant of coronavirus isn’t beyond the realms of possibility. It would also be incredibly problematic for the FTSE 100 firm. In such a situation, any thought of air travel recovering would quickly evaporate. As a result, the Rolls-Royce share price would likely head south again. 

Perhaps this is why Rolls was also seventh in the list of most popular sells at Hargreaves Lansdown last week. 

Opportunity cost

For me, however, the biggest reason for continuing to avoid Rolls-Royce hasn’t changed. Namely, the opportunities available elsewhere.

At a time like this, I’m asking myself what sort of business will provide me the best return over the long term. Is it one that will still face a huge debt pile and operational difficulties once the coronavirus storm has passed? Or is it one with sound finances, operating in a less cyclical space, that also stands a good chance of growing profits in the years ahead without huge amounts of investment? Perhaps it may even pay a dividend. I’m confident it’s the latter.

Have we seen the bottom in the Rolls-Royce share price? I’m cautiously optimistic. But not to the extent that I feel motivated to invest myself.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. 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.

Source link – www.fool.co.uk
Author: Paul Summers

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