Stock market

Why have Rolls-Royce shares just fallen below £4?

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In the last two years, Rolls Royce (LSE: RR) shares have shown the strongest momentum I can remember for a set. FTSE 100 The company has grown over 300% in just 24 months!

However, such momentum can be a double-edged sword. When a share’s price continues to rise, it can attract more investors and push it higher. This is great for existing shareholders.

But this can quickly lead to overvaluation, where the share price becomes disconnected from the firm’s underlying fundamentals and prospects. And it can cause a sudden correction (decrease of more than 10%).

After recently reaching 429p, Rolls-Royce’s share price has now fallen below 400p. Should I capture this dip to buy more shares? Let’s take a look.

Why is the stock falling?

As far as I can tell, there has been no news from the company to warrant a recent sell-off. And analysts are very bullish. Among 14 one-year price forecasts, the consensus is 447p, or 12% higher than the current 399p.

Only one of the 17 analysts currently has a sell rating on the stock.

Of course, brokers often overreact to what’s happening with share prices. If it’s going up, they’ll start raising their targets, and vice versa. So some may now change their minds and become bearish.

They remind me a bit of the bookies at the racetrack who change the odds as more or less money is placed on certain horses, dogs or whatever. All this may be speculative.

More likely, stocks are losing ground on reports that interest rates may hold longer than expected. In March, U.S. consumer prices rose 3.5 percent from a year earlier, more than expected. So maybe it is.

Defense shares are falling.

Another possible factor here is that it’s been a bad few days for European defense and aerospace stocks in general.

Shares of BAE SystemsIt has also been on fire over the past two years, retreating 4.8 percent since April 8. Meanwhile, Germany’s largest arms firm, Rhine metalIts share price has fallen nearly 6 percent.

Rolls-Royce’s defense unit accounted for about a quarter of the group’s revenue last year. So perhaps extensive sales in the sector have also contributed to the decline.

Actually, I find the timing of this decline in defense stocks somewhat surprising. Sky News today (April 11) reported that Israel could be attacked by Iran.imminent

Given such troubling geopolitical developments, I can only see defense stakes rising.

Should I buy this dip?

Of course, there’s more to Rolls-Royce than just defense. In its Civil Aerospace Division aircraft, large-engine flight hours this year are likely to reach pre-Covid 2019 levels (or perhaps even more).

Is this rosy outlook already priced into the stock? Maybe, in my opinion. It is trading at a forward price-to-earnings (P/S) ratio of 27.6. It doesn’t seem to make much of a safety difference.

Long-term, I’m still bullish on Rolls-Royce stock. I’d just like to see it come down some more, which is entirely possible given how fickle market sentiment can be.

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