One of the most popular disclaimers in the financial industry is “Past performance is no guarantee of future returns”This is true and investors should not blindly invest in stocks just because they have risen recently.
However, there are benefits to trying to predict the future by looking at past events and their impact on stock prices.Given the movement in rolls royce (LSE:RR)’s recent stock, what will this year offer?
look back on the past
The stock has fallen 20% last year. Over the past five years, this number has increased to 69%. So if you take the five-year average return, it’s negative 13.8%.
At first glance, I don’t feel confident putting in £1,000 of my hard earned money. If next year’s return is similar, I will not be satisfied. But we also need to understand the cause of this performance degradation.
A five-year drastic decline in stock prices followed the stock market crash in early 2020. Then, as the pandemic began to take hold, Rolls-Royce shares halved in a matter of weeks.
A major factor behind this was the impact on the commercial aerospace sector. The supply of new engines and the need to service existing engines for major airlines dried up almost overnight. With air travel reduced to near zero, most of the group lost their income.
By early 2023, businesses are already starting to move away from their heavy reliance on this sector. We have implemented restructuring and reduced some operations to reduce debt. So despite past stock performance that reflects the pandemic, it’s now in the rearview mirror.
A catalyst for the future
Given that the current stock price reflects all the bad news in the past, my returns this year are likely to be positive. If 2023 turns out to be a better year, the increased optimism should logically boost the stock.
One positive trigger is the easing of restrictions both inside and outside China. Given the size and income of these consumers, we can expect a surge in air travel. This should be an indirect benefit to Rolls-Royce.
Another factor is the outperformance of the defense division. Shares soared in December after confirmation of a US defense deal with Textron, which required thousands of engines from Rolls-Royce. Given the current focus on security, increased government spending globally in this regard is good for business.
On balance, I think stocks can Investing now will provide positive returns this year. It is based on a catalyst that can cause rallies. However, I am very aware of the performance degradation that dates back several years. This may make investors lose confidence in investing now. So save your money because I think you can find stocks with a higher risk/reward ratio to invest in for 2023.
Post What would be the return of £1,000 in Rolls-Royce stock this year? First appeared on The Motley Fool UK.
John Smith has no positions in any of the stocks mentioned. The Motley Fool has no positions in any of the shares mentioned. The views expressed about the companies mentioned in this article are those of the author and may differ from official recommendations on subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering diverse insights makes us better investors.
Motley Fool UK 2023