Rolls-Royce Holdings (LSE: RR) is in the news again. This time, it has earned the unfortunate distinction of being the fastest FTSE 100 faller today as I write. But a steep decline in the Rolls-Royce share price may be just the entry point for an investor keen on the stock. The big question looming in my mind is this – is it a good idea for a long-term investor to buy the stock?
I’d wait for some time, is my short answer.
The Rolls-Royce share price will fall further
There are three reasons for this. One, its recent fund-raise has implications for the share price. It just got a go-ahead for its rights issue from shareholders. While this has been in the works for the past month, the voting is completed only now. The rights issue will reduce the Rolls-Royce share price automatically, in any case. And the price has already fallen fast today. I want to see how this situation develops further before making a call on buying the stock.
Rolls-Royce faces lockdown drag
Next, there’s no end to the lockdowns in sight. And there’s no coronavirus vaccination in sight either. It’s reasonable to assume that civil aviation isn’t exactly coming back with a bang for the rest of 2020, unless we get a Christmas miracle. RR’s biggest business involves supplying to the sector. It follows that Rolls-Royce’s business will remain lacklustre for some time. This, in turn, will show up in its share price.
Too much volatility
The Rolls-Royce share price may show spurts of increase, like it has done in recent weeks. But instead of this going in RR’s favour, that only makes it more volatile. This is the third time I’m writing about the stock in the past four weeks. The impetus for it each time is a glaring change in share price, which I think interests you, the reader and investor.
The upside
I see Rolls-Royce’s appeal. This is a great opportunity to buy a piece of one of the best known British brands, with a long legacy that represents quality. With patience and a really long time-frame, buying the RR stock right now might not be a bad idea. In fact it could turn out to be the best contrarian play in retrospect.
I say this as someone who has invested in easyJet’s shares, knowing full well the risk that goes with that. If an investing portfolio is mostly majority defensive stocks, I think peppering it with cyclical plays, like RR, may just be the extra boost it requires over time. When the stock market is back and the economy booms, things could look very different.
But I’d have to bide my time, and also be prepared for a total loss. So, anyone who prefers to play safe — I totally get it.
