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A year is a short time in the stock market, since any look at the Rolls-Royce Holdings (LSE: RR.) shows the share price.
The company has been a real star of the recovery since the Covid pandemic. And in the last 12 months, the price has risen 170%.
FTSE 100 growth star
That's enough to turn £10,000 into £27,000. Growth stocks like that don't come around too often. And it rarely happens with a FTSE 100 stock.
These blue-chip companies are supposed to be mature and boring, right? For the most part, they have settled on modest growth and consistent dividends year after year.
Well, obviously, a crisis like the 2020 stock market crash can turn that on its head. All bets are off and we can find big winners and losers almost anywhere.
Key lesson
I learned a lesson from what happened to Rolls-Royce. Part of this is that we should never panic just because a stock falls.
No matter what, selling just because that's what everyone else does has to be a bad decision. And the same goes for purchasing just because everyone else is joining in.
No, even in times of crisis, we must keep a cool head and carefully observe the fundamentals of a stock.
That means I try to buy or sell based solely on how I see a stock's long-term prospects.
Hard to do
That's easy to say. But I find it difficult to keep my mind off the crisis and boom of the last few years.
Still, I try to do one thing and ask myself a question. What if Covid had never happened, if Rolls-Royce's share price hadn't plummeted and it hadn't needed to rise again like it has?
What if everything went in a straight line from February 2020 until now? And if the brokers' forecasts remained exactly as they are today.
Valuation
We'd be looking at a 29% share price increase over five years, which is still fair.
But going back 10 years, there is a gain of only 7%. The FTSE 100 achieved 17.5% in that time, which in itself is pretty poor.
That 12-month winner doesn't look so good now. He seems more like a 10 year old loser.
If you had put that £10,000 into Rolls-Royce shares a decade ago, it would be worth just £10,700 today. Well, more dividends. But they were weak even before Covid stopped them.
Now what?
What could £10,000 at Rolls-Royce become in the next 10 years? We can only look forward. And forecasts show strong profit growth over the next three years.
The forecast price-to-earnings (P/E) ratio for 2024 has risen to 28, more than double that of the FTSE 100 at the moment. However, it could fall below 20 by 2026. And net debt has now been reduced to just £2bn.
What happens to the Rolls-Royce share price in the next 12 months? It may be good. But I don't expect another 170%.
