Last month, shares in Rolls-Royce (LSE:RR) hit a 52-week high at 160p. Even though the stock has retraced modestly, it’s still close to this price.
It marks an impressive 57% gain over the past three months, with Rolls-Royce shares up 31% over a longer one-year timeframe. Yet given I’ve missed out on this jump, is it worth buying the stock now?
The case for buying now
It’s human behaviour to not want to buy a stock that has jumped in price. This is the same trait that makes us eager to buy something (a stock, food, clothing) when the price has fallen. We all love a deal!
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Yet for an investor like me, a move higher in the share price doesn’t mean the stock is always overvalued. In fact, even at 160p, it looks relatively cheap if I note that five years ago the price was 300p.
Granted, times have changed and the business is now different. But it does highlight that there’s a key difference between something increasing in price and it being overvalued.
Aside from the price, fundamentally the business looks great going forward. The annual report showed much better figures on revenue, debt levels and, importantly, profit. Under the new leadership of Tufan Erginbilgic, the winds of fortune certainly seem to have shifted.
As for 2023, the big improvement in free cash flow should allow the business to operate more efficiently. As international travel demand continues to return, the Civil Aerospace division should also bring in higher revenue.
Why I could stay away
One factor that does weigh on my mind is if the share price correctly reflects all public information. The annual report has been fully digested. Even though it was positive, I feel this could be fully reflected in the stock. Put another way, investors are already expecting good things to come from Rolls-Royce.
So if the business simply performs as expected, or even slightly underperforms, there could be very little room for the stock to move higher later this year. The bar is now set high, and it’ll likely need some spectacular news to push it even further.
Another point I flagged up last month is that despite net debt being reduced, I struggle to see how it can meaningfully be cut further. The reduction from £5.1bn to £3.3bn was primarily due to cash from selling off a group business.
The firm doesn’t have similar assets to sell, so it’s going to have to use retained earnings to bring this down further. As a general rule of thumb, this is going to take a while.
My overall take
The jump to 52-week highs is a positive, particularly for investors that bought when things looked uncertain last year. However, I struggle to find enough reasons to justify investing right now. For the moment, I’m going to hold on to my cash and see how the stock moves over the next month.
