Why I think Rolls-Royce shares could crash

Rupert Hargreaves
·3-min read
Risk reward ratio / risk management concept
Risk reward ratio / risk management concept

Rolls-Royce (LSE: RR) shares have jumped by more than 50% over the past few weeks. Investor sentiment has dramatically improved on the back of this month’s positive vaccine news. With at least three vaccines in the pipeline, investors are starting to look past the coronavirus crisis.

However, Rolls’ long-term prospects are far from certain. Indeed, analysts believe that it could take up to five years for the global aviation industry to recover to 2019 levels of activity. This suggests the company is in for several more years of uncertainty.

And with that in mind, I’m not optimistic about the near-term prospects for Rolls-Royce shares.

Rolls-Royce shares: Overvalued?

As I have noted in the past, this British engineering stalwart owns one of the most respected brands in the world. The group also owns the rights to valuable technology. Both of these facts give the enterprise a strong competitive advantage over its peers.

So, from a long-term perspective, I think Rolls has the potential to be a good investment. The problem is, I think the near-term outlook for the business is highly uncertain. The company has only just managed to avoid bankruptcy by asking its investors to provide billions of pounds of support to the group. While the market seemed happy to stump up the money for this cash call, there’s no guarantee it’ll be enough to get Rolls through the current storm.

What’s more, the recent performance of Rolls-Royce shares makes it difficult for me to place a value on the business. The stock has outperformed the market during the past few weeks. I don’t think it’s worth more today than it was a few weeks ago because there’s still so much uncertainty about the firm’s future. At this point, we don’t know if the aviation industry will recover in 2021, 2025 or 2030.

Uncertainty prevails

All in all, Rolls-Royce shares are shrouded in uncertainty at present, and I’m avoiding the stock as a result. There’s a lot of good news already factored in to the share price, I feel.

In my opinion, it won’t take much for investors to review their positions on the business. Another wave of coronavirus or a significant bankruptcy in the sector may cause investors to rethink their opinions on the stock quickly. That could lead to a short, sharp sell-off. I’d rather sit on the sidelines for now and wait for a better buying opportunity.

That’s not to say that I’m not excited about the long-term potential for Rolls-Royce shares. I think the company has the potential to yield considerable returns for investors in the long run if management can get the business back on track. So, I’m keeping the business on my watchlist. In the meantime, however, I’m content to wait and see what happens next in these uncertain times.

The post Why I think Rolls-Royce shares could crash appeared first on The Motley Fool UK.

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Rupert Hargreaves 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.

Motley Fool UK 2020

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