Rolls-Royce (LSE:RR) shares are one of the most popular stocks to own in the UK. In fact, some financial institutions seem to be very fond of it. As much as 30% of the business is held by only 10 of them, mostly involved with pensions. But while the professionals might be obsessed with this engineering giant, is this popularity warranted? And if not, then where should I be looking to invest?
A closer look at Rolls-Royce shares
Investors who bought Rolls-Royce shares a few years ago are likely looking at a red mark in their portfolio. That’s because, over the last five years, this stock has fallen by around 45%. Most of this decline was seen in early 2020 after the pandemic decimated its aerospace revenue stream. But even if I look at share price performance between December 2016 and 2019, it only climbed by a mediocre 4.6%. That doesn’t even beat inflation on an annualised basis. So, what happened?
For a long time, the financial state of this enterprise has been pretty dire. Only one out of the last five years have been profitable, which pushed management to take on considerable debt even before the pandemic reared its ugly head. Needless to say, that’s not the sign of a healthy and thriving business. And with Covid-19 only exacerbating the problem, I’m not surprised to see the stock take such a massive hit.
But recently, the situation has improved. The company is undergoing some fairly massive restructuring to cut costs. And its aerospace division is back on the mend as demand returns for its aircraft maintenance services. Therefore, Rolls-Royce shares may be primed to make a rapid comeback in 2022. And if that were to happen, then an investment as small as £1,000 could prove to be quite lucrative. But is there an even better buying opportunity elsewhere? I think there is.
Fallen from grace but capable of rising again
When investigating Rolls-Royce shares, many investors like to focus on its aerospace division. After all, it’s the group’s primary revenue source. However, it also has sizeable operations within the defence industry. That’s a sector in which Avon Protection (LSE:AVON) has recently fallen from grace as far as the market is concerned.
Avon designs and manufactures personal protective equipment for the armed forces as well as first-responders. And until recently, the stock was thriving, reaching as high as 4,650p in early December 2020. However, looking at the share price today, almost all the gains made in the last five years have been wiped out. There are undoubtedly numerous reasons why shares of Avon Protection have collapsed. However, one leading factor is a failed body armour test for the US Defence Logistics Agency, which significantly impacted growth expectations.
Yet the income from its flagship respirator and ballistic helmet product lines remains uncompromised, with double-digit growth still being delivered. That’s why I believe investors may have overreacted, creating a buying opportunity for my portfolio. And with a much stronger balance sheet than Rolls-Royce, these shares look like a better comeback story, in my opinion. As such, I’m not convinced buying Rolls-Royce would be so smart for me. I’d ignore Rolls-Royce and buy Avon for my portfolio.