The Rolls-Royce Holdings (LSE: RR.) share price rise has been a brilliant stock market success story.
Since October 2022, Rolls-Royce shares have more than six-bagged, to 427p as I write. And it seems like only days ago that we were wondering if the price could reach £4 this year.
What could make it keep heading up further in 2024?
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Fundamentals
Inflation is slowing, and interest rates might even start to come down as early as May. That could help the civil aviation business, and get more hours on Rolls-Royce engines.
The great unrests in the world are giving defence spending a boost, which should also help firms like Rolls-Royce. A lot of European countries have already announced big plans.
It could support the strong forecasts for profit growth in the next few years that we see today.
The thing is, there’s nothing new here, and this is all well enough known by investors. But I think two key things could be pushing the Rolls-Royce share price higher than might be justified by fundamentals.
And that could spell danger.
Broker consensus
Not long ago, the consensus share price target from broker forecasts was around 400p. It was quickly broken, and it’s now up at 440p. And that makes me ask a key question.
What made the brokers change their mind?
Did they look at the evidence again, re-do all their sums, and work out they were wrong and had set it too low? Or did they just think: “Hmm, it’s gone up, so we’d better raise it some more.”
Almost all analysts have Rolls-Royce as a buy, and almost nobody says we should sell.
And I reckon it will stay like that as long as the price keeps rising. Then one day it will stop, might even fall, and brokers will change their minds.
But my money says they’ll only do that after things start to stall, not before. Brokers are great at looking at what’s already happened and just adding a bit.
Sentiment
This ever-growing push is helping keep the upward trend going. Investors see the latest upgrade from a respectable analyst, and that boosts their confidence.
Bullish market sentiment then feeds back into the party and encourages the City to keep the ball rolling.
I recall the old saying that “the trend is your friend until the bend at the end“. But nobody seems to spot the bend until after it’s bent.
It looks to me like a lot of share traders don’t do anything more complex than buy what’s going up and sell what’s going down.
That sentiment pushed Rolls-Royce shares to depths that we now see were too low. And I reckon it will also push them too high, now they’re on the way up.
What to do?
I do still think Rolls-Royce is a great company with a strong long-term future. And one day, I might rate its shares as good value for a long-term buy.
But while I think the price is being driven almost entirely by momentum, it’s not the time for me.
