In December, a lot of investors start turning their eyes to 2021. I’ve been doing this as well, trying to find which stock could have the potential to double my money during this period. From looking at Rolls-Royce (LSE:RR) shares, I think it could be a candidate for delivering high returns.
Rolls-Royce shares have the potential to possibly double in value as they’re starting from a low base, I feel. The share price spent most of the year falling in value, as the pandemic hit the business hard. So from a standing start at 130p, the share price could double to 260p. If it did, it would be back at levels seen in November of last year. Doubling my money wouldn’t mean the share price would have to break all-time highs, or grow profits to impossible figures never seen before.
External factors: vaccine progress
Although we need to tread with careful optimism, the recent vaccine news sounds very positive. Here in the UK, the first batches have already arrived, and will be distributed to the NHS this week. The boost to Rolls-Royce shares was seen when the news first broke last month. I wrote about how the share price jumped over 35% in a single day.
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Should the vaccine rollout be smooth and successful, I’d expect the share price to continue to move higher. The business will be an indirect benefactor of the aviation sector seeing higher demand from consumers. During Q2, Rolls-Royce reported a 75% reduction in engine flying hours. If the vaccine enables more people to fly, and engine flying hours increase, Rolls-Royce will perform a lot better.
Internal factors helping Rolls-Royce shares
In the short term, the news in June about cutting 3,000 jobs at the business wasn’t seen as a positive. However, I expect Rolls-Royce shares to perform strongly into next year as the overall restructuring and cost-cutting starts to benefit the business. On top of the job cuts, the business had saved costs of £350m by the end of H1. It expects to have cost mitigations of £1bn by the end of the year. This size of cost-cutting enables the firm to be more financially secure. After all, profit is simply revenue minus costs. If revenue is low but costs are also low, profits won’t be harmed as much as we might think.
The final reason I think Rolls-Royce shares could have strong upside potential is its management’s strategy. Recently, senior executives made it clear that cost-cutting is part of a larger restructure of the entire business. Director Simon Burr said last week that “we don’t rule ourselves out of any part of the market today because evolution in the 2020s could be really quite exciting.” This has led to some believing Rolls-Royce could go back to making engines for smaller aircraft.
The business is also shifting focus back towards the nuclear and defence departments. As this year has shown, demand here is more reliable than in the aviation part of the business.
Rolls-Royce shares could be standout performers for 2021, I think, and are firmly on my watchlist in the short term.
