The Rolls-Royce share price has dropped. Would I buy it now?

A Rolls-Royce employee works on an engine

Until a few months ago, the Rolls-Royce (LSE: RR) share price was languishing in penny stock territory. But after it reported surprise profits in the last quarter, the stock has been consistently trading above 100p levels. 

Rolls-Royce share price tumbles

It remains there even now, but the share price has come off some 6% in the past two weeks. At any other time, I may have chalked it up to a routine market fluctuation, that can balance itself out in time. Not now. I have been watching pandemic sensitive stocks closely since I learned about the possibility of a firebreak lockdown, following the recent increases in Covid-19 cases. So far, they have broadly reacted with a softening in share price. In fact, the FTSE 100 index has also been weak recently, indicating some overall bearishness. 

If this lockdown actually happens, I will stay away from travel and travel-related stocks, considering the damage caused to them last year. They had only just begun to emerge from the worst of the pandemic, when the challenges began afresh. Since the virus is even more potent during the winter months, which will come around soon enough, I am now even more cautious about these stocks. 

What’s going for it

There is of course a possibility that the fast progress on vaccinations, booster jabs, and the cooling off in travel after the summer months can control further spread of the virus. And investor bullishness can return to the stock markets. If that happens, I think the future for Rolls-Royce could actually look good. 

Since its positive results, it has also reported winning a government contract along with a consortium of organisations. Even more recently, it has entered into a contract with South Africa’s Airlink to service its aircrafts for the next 10 years. In sum, the company’s business appears to be progressing well. I am particularly heartened by signs of growth in its civil aviation segment, which was its biggest revenue generator before the pandemic. 

My takeaway

In a recent article on the company, I said that the Rolls-Royce share price will be impacted by three factors. One, overall market mood. Two, macro conditions. And three, its own news flow. So far, the third of these is going in its favour. The macro economy has not given any reasons for red flags either. That leaves us with the market’s mood, which I reckon will depend on how the coronavirus situation develops.

Even earlier, I was waiting for more signs of genuine recovery in the company before buying the stock. So far, it has shown profits for only one quarter and that too because of a big tax credit. Additionally, there is a rise in pandemic risk once again. This tips the balance against the Rolls-Royce stock for me, at least for now. I will watch how the situation evolves before making a call.

The post The Rolls-Royce share price has dropped. Would I buy it now? appeared first on The Motley Fool UK.

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More reading

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  • Why I think the Rolls-Royce share price is a bargain
  • Is the rising Rolls-Royce share price a buying opportunity?
  • Why I prefer the Lloyds dividend to the Rolls-Royce share price

Manika Premsingh 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.