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Last month, the shares of rolls royce (LSE:RR) peaked at 52 weeks at 160p. Even though the stock has pulled back modestly, it is still close to this price.
It marks an impressive 57% gain in the last three months, with Rolls-Royce shares climbing 31% in a time period longer than a year. However, since I missed this jump, is it worth buying the stock now?
The case to buy now
It is human behavior not to want to buy a stock that has risen in price. This is the same trait that makes us eager to buy something (a stock, food, clothing) when the price has gone down. We all love a deal!
However, for an investor like me, a higher movement in the stock price does not mean that the stock is always overvalued. In fact, even at 160p, it seems relatively cheap when you look at how five years ago the price was 300p.
Of course times have changed and business is different now. But it does highlight that there is a key difference between something going up in price and something being overpriced.
Price aside, fundamentally the business looks very good going forward. The annual report showed much better numbers on revenue, debt levels, and most importantly, profit. Under the new leadership of Tufan Erginbilgic, the winds of fortune certainly seem to have turned.
As for 2023, the big improvement in free cash flow should allow the business to operate more efficiently. As the demand for international travel continues to return, the Civil Aerospace division should also generate higher revenue.
Why could I stay away?
One factor that does weigh on my mind is whether the stock price correctly reflects all public information. The annual report has been fully digested. Although it was positive, I feel like this could be fully reflected in the action. In other words, investors are already expecting good things from Rolls-Royce.
So if the business simply performs as expected, or even slightly underperforms, there could be very little room for the stock to rise later this year. The bar is now set high and you will likely need some spectacular news to push it further.
Another point that I made last month is that even though net debt was reduced, I have a hard time seeing how it can be reduced further significantly. The reduction from £5.1bn to £3.3bn was mainly due to cash from the sale of a group business.
The company doesn’t have similar assets to sell, so you’ll have to use retained earnings to narrow it down further. As a general rule, this will take a while.
my general opinion
The jump to 52-week highs is positive, especially for investors who bought when things looked dicey last year. However, I struggle to find enough reasons to justify investing at this time. For now, I’m going to hold on to my cash and see how the stock performs over the next month.
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