The sort of performance put in by Rolls-Royce (LSE: RR) in recent years is the stuff of investor dreams. Rolls-Royce shares have been among the strongest FTSE 100 performers for multiple years in a row.
There is potentially an interesting lesson in that.
At the start of last year, for example, Rolls-Royce shares had already been on a terrific run, so many investors who may have been tempted to invest likely decided against it. That was certainly my approach at that point. But doing so has meant missing out on some strong performance since then.
Of course, hindsight always arrives when it is least useful. Still, could it be that – even now – the aeronautical engineer might potentially offer me a long-term bargain for my portfolio?
Here’s what non-investors have missed out on
Since the start of last year, the Rolls-Royce share price has risen by 136%.
That means someone who invested £15,000 in the shares at this point last year and held on to them would now be sitting on a holding valued at roughly £35,400.
On top of that, there are dividends. The current yield of 0.7% may seem small, but given the cheaper share price at the start of last year, someone who bought then would be earning a higher yield. They ought to be earning almost £250 a year in dividends.
Buy, sell, hold? When?
I mentioned that the capital gain calculation presumed an investor who bought at the start of last year held those shares until now. That is a period of a year-and-a-half or so.
But not all investors would have done that. When a share does very well, as Rolls has, there is a clear split in thinking between some investors who follow the mantra ‘you don’t lose money taking a profit’ and others who believe in riding their winners.
Both approaches can have pros and cons as I see it.
I try to think of investments with a long-term approach. When buying a share, that can be fairly simple: the question is whether I can purchase a share in a promising business at what I see as an attractive price.
What can be more difficult is deciding what to do when a share still has strong momentum but looks overvalued: take profits by selling, or hang on?
My concern with buying Rolls-Royce now
I sold my shares in Rolls-Royce several back at what I felt then was a handsome profit.
By not hanging on I have missed out on significant subsequent price gains.
I sold because I feared it was overvalued. Rolls benefits from a large installed user base, high barriers to entry in its business areas and strong demand across all three of its main activities: civil aviation, defence and power systems.
But with the stock selling for 46 times earnings, I think exceptionally high expectations for business performance are already built in. I see volatile oil prices and geopolitical uncertainty in the Middle East posing a risk to civil aviation demand.
For now, that has not affected Rolls. But I do not feel the shares offer me a suitable margin of safety at the current price. So I have no plans to invest.
Should you invest £5,000 in Rolls-Royce Plc right now?
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Christopher Ruane does not hold any positions in the companies mentioned.
