There’s a new reason why I like Rolls-Royce shares

Shares in Rolls-Royce plummeted last year, but I think there’s a quite new reason why the shares could recover and even boom.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When a share price collapses, a buying opportunity can be created. Last year, shares in Rolls-Royce (LSE: RR) fell by a third. To some, this made the company’s shares seem tempting. If you’re one of those contrarian types who sees opportunity when a share price drops sharply and are still considering buying into Rolls-Royce, I’d like to suggest that there’s another reason other than just a low price to invest in the company.

I’d go further still and would suggest investors looking for companies with partial solutions to the challenge of combating climate change should consider this share. This may seem like a surprising assertion, so let me explain why.

Rolls-Royce is leading a UK consortium to develop what are known as small modular reactors (SMRs). These are small nuclear power plants that are around 10% of the size of traditional nuclear reactors.

The problem with traditional nuclear power relates to reactor size and may not apply to the reactors the firm is helping develop. It means there are limited economies of scale resulting from the construction on the traditional variety. The appeal of small modular reactors lies with the word modular.

Why modular?

Renewable energies, such as wind turbines and solar farms, have seen their costs fall enormously — the cost of solar PV modular has fallen by 95% since 2008, for example, according to data from Bloomberg and the New Economics Foundation. Wind and solar prices have fallen sharply because they’re subject to what’s called a learning rate, every increase in their total installed base leads to a fall in their cost. Electricity costs generated by nuclear power stations, by contrast, seem to increase over time.

Small modular reactors, on the other hand, are likely to benefit from significant economies of scale. Rolls-Royce itself emphasises this and talks about using off-site modular construction, making the modular units at scale. 

Another benefit of small modular reactors is that because of the way they operate, with high fuel burn-up rates, they often entail much less waste than traditional reactors.

Nuclear power and renewables are not natural bedfellows. Because of the intermittent supply of renewables (no solar power when it’s dark, no wind power when it’s still), an ideal complementary technology would be one in which the energy supply can be easily turned up and down when needed. Traditional nuclear energy doesn’t really fit this bill as it tends to supply energy at a constant rate and has high set-up costs.

But small-scale reactors could be more useful here. The war against climate change will entail many battles, and such small-scale reactors may play a key role in some of them.

If you believe that climate change poses a big risk to us all, but also think there’s opportunity in investing in companies that are engaged in the front line of this battle, then a superficial glance might suggest that Rolls-Royce, more famous for its aircraft engines, is not an obvious candidate. But I’d advise looking deeper. Finding opportunities that are not obvious could be an extremely profitable investment strategy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Michael Baxter has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »

Investing Articles

Up 105% in a year! Is this rocketing FTSE bank the perfect pick for my Stocks and Shares ISA?

Harvey Jones is drawing up a shortlist of stocks to purchase inside his Stocks and Shares ISA allowance. This FTSE…

Read more »

Investing Articles

Down 78%, is this once-hot AI growth stock set to explode like the Rolls-Royce share price?

Our writer asks if he should invest in Super Micro Computer (NASDAQ:SMCI) following the growth stock's massive recent decline.

Read more »

Investing Articles

Is it madness to buy Palantir shares after Q3 earnings?

Palantir stock's surging again after the firm's Q3 earnings report. But after a 150% gain, is it too late to…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£6,000 in savings? Here’s how I’d aim to turn that into £1,032 a month of passive income!

A small investment in high-dividend-paying stocks with the returns used to buy more shares can generate big passive income over…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Investing Articles

As Lloyds’ share price tumbles 14%, is this an unmissable opportunity for me to buy at a bargain-basement price?

The Lloyds share price is substantially below its year high, but decent earnings prospects should drive its price and dividend…

Read more »