On 9 January, Rolls-Royce (LSE: RR.) shares hit a new all-time high around 1,290p. Today however, the shares are still around 1,290p, meaning they’ve essentially been dead money for five months.
This begs the question – what’s going to kick-start the Rolls-Royce share price and get it moving higher again?
A healthy pause?
I’m not really surprised that Rolls-Royce shares are experiencing a period of ‘consolidation’ at the moment. Because the shares have had a massive run in recent years (rising more than 1,500%) and now trade at a lofty valuation (the price-to-earnings (P/E) ratio is 35).
Usually, at some stage, a high-flying stock will pause for breath and trade sideways for a while. This allows gains to be digested by investors and the company to grow into its valuation. This it can set the stock up for its next move higher.
What will send the share price higher?
In terms of catalysts that could propel the Rolls-Royce share price out of its current trading range, I see a few potential scenarios that could do it:
- A drop in oil prices: high oil prices are resulting in airlines cancelling flights, which isn’t good news for Rolls-Royce as it generates revenues from aircraft engines being serviced. So lower prices would be a positive here.
- Better-than-expected H1 results: if Rolls-Royce’s H1 results, scheduled for 30 July, are better than expected and/or the company raises its profit guidance, the shares could see a pop.
- Bullish broker activity: there are a number of brokers who rate the shares as a Hold at present. If one or more of these firms were to upgrade them to a Buy rating and raise their price targets significantly, it could boost the stock (note that Berenberg just did this on 12 June).
Alternative scenarios
Of course, there are no guarantees that any of these scenarios will play out. There’s a possibility that the shares could continue trading sideways for months or even years. Because, as I noted above, they do look expensive at the moment. The stock may need more time to grow into its lofty P/E ratio.
Investors also need to consider the possibility of share price weakness from here. We could see this if oil prices spiked or if H1 results were disappointing.
At a P/E ratio of 35, there really isn’t much room for error here. If we get some bad news, the stock could easily fall 10% or 20% in the blink of an eye, given its valuation.
I’m not a buyer today
Given the lofty valuation today, I’m not a buyer of the shares right now. I just think that gains could be limited from here in the medium term.
If the stock was to experience a decent pullback however (to say 1,000p), it could be a different story. At that price level, I may be interested in snapping it up for my portfolio.
Should you invest £5,000 in Rolls-Royce Plc right now?
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Edward Sheldon does not hold any positions in the companies mentioned
