Rolls-Royce (LSE: RR) shares have fallen more than 30% in 2022 alone and now change hands for pennies rather than pounds. I doubt they will stay this low for long. In fact, I can think of three reasons why the share price could roar back to form in the coming months.
More defence spending
The invasion of Ukraine by Russian forces has been terrible. It’s also motivated nations to increase their defence spending. Seen purely from an investment perspective, this should prove a tailwind for Rolls. The firm is a leading producer of aero engines for military transport and patrol aircraft with 150 customers in over 100 countries.
Travel demand
Scenes of long queues at UK airports have become a fixture of news programmes this summer. Airlines have been cancelling flights due to staff shortages and people are rightly upset.
But consider the flipside. This does show demand for air travel is now very much back. That’s good news for Rolls and its engine servicing/maintenance division. The prospect of a recovery in earnings here could drive more investors into buying Rolls-Royce shares.
A better company
While the last few years have been pretty awful for the company, the huge amount of cost-cutting Rolls has been forced to take now leaves it in arguably better shape. The disposal of ITP Aero is another step in the right direction, as far as I’m concerned.
Should we get more good news on its balance sheet in August’s half-year results, I can see previously-wary investors being more willing to take stakes.
So will I be buying?
As lucrative as it can sometimes be to take positions in bombed-out stocks, I won’t be investing in Rolls-Royce shares today for a few simple reasons:
- Despite that aforementioned cost-cutting, there’s still a lot of debt on the company’s books. This is worrying if interest rates keep climbing.
- Rolls is facing pressure from unions to increase wages. That’s understandable as inflation gallops higher. However, it will put more pressure on the FTSE 100 member’s finances.
- There are no dividends to tide me over until a recovery kicks in. Since time is the most precious commodity we have, I’d prefer to be paid for being patient.
- Covid-19 hasn’t been defeated just yet and could cause more disruption in the months ahead.
There’s more…
Rolls-Royce shares: do I have an edge?
Taking a contrarian position in anything requires me to identify when would be a good time to buy but also when it would be appropriate to sell. With Rolls-Royce shares, I sincerely doubt I can get that timing right, or that I have an edge over other investors. To quote former American politician and businessman Donald Rumsfeld, the number of ‘known unknowns’ is very large indeed.
As a signed-up Fool, I’d far rather buy a brilliant, easy-to-understand company at a reasonable (note: not necessarily cheap) price with the intention of holding for years.
Shopping spree
Lots of companies are in my shopping basket right now. Whether they all make it to the till is another thing entirely. Regardless of thinking that it will soon trade above £1 again, Rolls-Royce won’t be one of them. I maintain that there are far too many better opportunities elsewhere on a risk/reward basis.