Rolls-Royce (LSE: RR) shares have smashed every stock on the FTSE 100 over the past month, soaring 40%. The only company to come close is grocery tech specialist Ocado Group (LSE: OCDO), which grew 35%. Over the same period, the index fell 0.67%.
These two growth stocks have made some investors rich, depending on when they bought them. Yet I’m wary of buying them in case I jump on the bandwagon just as the wheels come off. Are there still riches to be had?
It’s all about tomorrow
Both stocks have been highly volatile, for different reasons. Long-haul aircraft engine maker Rolls-Royce suffered a dismal decade, including multiple profit warnings and a bribery scandal, even before the pandemic wiped out air travel. At one point, its share price had lost three-quarters of its value, hammering long-term investors.
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Ocado investors can feel their pain. Its shares suffered a peak-to-trough drop of almost 90%, from 2,808p in February 2021 to 358p as recently as 2 June. The recovery has been dramatic. They’ve more than doubled to 808p since then.
Ocado’s grocery warehouse robots are state-of-the-art and it already runs 23 automated customer fulfilment centres with grocers across the US, Europe, and Asia. Yet it has not been expanding as quickly as investors would like.
At some point, Ocado has to turn its massive potential into cold hard cash, and it’s not there yet. Revenues are steadily rising but its losses are brutal, as my table shows.
| Revenues | Pre-tax losses | |
| 2018 | £1.60bn | (£44.4m) |
| 2019 | £1.76bn | (£214.5m) |
| 2020 | £2.33bn | (£52.3m) |
| 2021 | £2.50bn | (£175.9m) |
| 2022 | £2.51bn | (£500.8m) |
It recently posted a half-year loss of £289.5m and the negative numbers are expected to roll up all the way to 2027. It could be a tense wait for investors and there is no dividend to keep them happy. Net debt is forecast to climb from £1.2bn this year to £1.55bn in 2024. My worry is that it could force the board into a capital raise that would dilute existing shareholders.
Rolls-Royce doesn’t pay a dividend either, but at least it is making money. New CEO Turfan Erginbilgic is off to a flier after upgrading full-year profit expectations to between £1.2bn and £1.4bn and cash flows are set to rise sharply, too.
I know which one I’d buy
Markets expect the first dividend to come through in 2024. Rolls-Royce also has net debt, of £2.8bn, but that’s expected to decline to £1.16bn by 2024. My big worry is that the share price has gone too far too fast, after rocketing 139.65% in a year.
The Ocado share price has also gone up too far, too fast. Especially since the initial trigger was a rumoured Amazon takeover, so far unsubstantiated. It’s down 5% over the last week and I don’t feel this is the right time to buy. Rolls-Royce is already gunning its engines and I’ll go for that first.
I think Rolls-Royce will make me rich if I buy its shares today, especially since I would hold them for at least a decade. I just think they would make me slightly richer if I bought after they give up some of their recent stellar gains. I’ll build my ammunition and wait for the right moment. Then I’ll take another look at Ocado.
