Rolls-Royce (LSE:RR) shares gained more than 200% in 2023. It was an exceptional rise, and momentum has remained strong throughout the year.
Three months ago, the shares were trading for 203p. And at that time, they were up around 270% over 12 months having dipped to near 60p a share during Liz Truss’s premiership.
So, if I had invested £1,000 in the FTSE 100 stock three months ago, today I’d have £1,510. That’s an impressive 51% gain over such a short period of time.
This also goes to show that companies that have surged can continue doing so. Momentum is indeed an important factor, and can often be the best indicator of future performance.
Holding my winners
I do own Rolls-Royce stock, and it’s been good to me. However, I was recently reminded of an old adage — hold your winners.
Last week, I started cutting or selling entire positions in stocks in my portfolio as I gear up to buy a house. And I came to my holdings in Super Micro Computer.
The AI-enabling company was up around 300% over 12 months, and I came across an article suggesting the bull run was over.
I made a rushed decision, not realising that the firm was reporting earnings two days later. So I sold, Super Micro upped its guidance hugely, and the stock jumped 45%.
So, while I do need to liquidate some of my positions, I’ve been given a stark reminder of what can happen if I look to take my profits too soon.
Incidentally, these events tend to happen annually for me, even though I’ve been investing for some time. Last year it was BAE Systems… hopefully I’ve learned my lesson for good.
Tailwinds and headwinds
Would I buy Rolls-Royce shares now? Absolutely, if I had the money.
Including this year, earnings per share are expected to grow at 71% annually over the medium term. Yes, we’re starting from a low bar, but that’s really impressive.
This growth is will be driven by demand across all three business segments; civil aviation, power systems, and defence.
The order backlog in defence rose from £8.5bn to £8.9bn last year while the civil aviation sector is recovering much faster than expected following the pandemic.
In fact, there are several near-term and long-term tailwinds in civil aviation. Firstly, booming travel demand — travel has cemented itself as a ‘must have’ in Europe — is pushing engine flying hours up. Remember, Rolls earns money depending on how often its engines are used.
And secondly, long-term aviation demand is very strong. Some 40,000 new aircraft are expected to be ordered by the industry over the next two decades.
The only downside is that most of this demand — 80% of it — is for engines that are used on narrow-body jets. And Rolls-Royce left this market this market a decade ago.
The engineering giant might need to pivot back to the narrow-body market to fully benefit.
