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Shares in engineering giant Rolls Royce (LSE:RR) were looking more positive this week as sentiment around the stock seems to be evolving quickly. There is little news flow, but more investors seem to be prepared to buy into the stock than even three months ago.

Rolls Royce has been through a tough year if ever there was one, prompting unprecedented action from the engineering giant. COVID has had a direct and resounding impact on the firm’s civil aviation business, and it is only now starting to emerge again.

The gradual global roll-out of the vaccine seems to have injected a level of positivity into the sentiment around Rolls Royce, and we are seeing this in the share price action.

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Investors stung by poorer than expected set of results

Rolls Royce reported a net loss of £3.9bn for the 2020 financial year, mainly due to the impact of the Covid pandemic on the aviation sector. Revenue fell from £15.4bn to £11.7bn over the year. It also cut 7000 jobs and had to raise cash. A further £2bn was sought from disposals.
This was a larger than expected loss, but the company is sticking to previous guidance and is reiterating that it expects to turn cash flow positive in the second half of this year.

Deutsche Bank has Rolls Royce as a hold with a target price of 97. Bank of America has reiterated its target price of 80 (12 March). These are the most valid post-vaccine broker calls, reflecting the new situation for the company. Berenberg called Rolls Royce shares a buy on 14 December. The bank has a target price of 140, down from its old price target of 250.

At the time of writing the stock was trading at 117. We think there may be some upside in Rolls Royce shares and the brokers may be slightly off on this one – other than Berenberg of course.

AI data indicates strong bullish posture from investors

Latest data from artificial intelligence specialists Irithmics indicates that institutional investors – including large scale investors like fund managers – are broadly positive on the prospects for Roll Royce.

Data received by The Armchair Trader Monday from the UK machine learning consultancy, indicates that investors have a strong short term positive bias to Rolls Royce. There is also positive sentiment on the long term, but this seems less strong.

Related

The numbers seem to be reflected in the Rolls Royce share price: the stock had been in a little bit of a doldrum from the end of January, but has been moving up gradually back towards the recent high of 134.90 established on 3 December. Shares in Rolls Royce Holdings had come off since early December.

Irithmics bases its analysis on the processing of data from numerous different sources and historical analysis of investor behaviour as well as numerous other criteria.

Civil aviation is coming back this spring

Investors seem to be expecting a boost to civil aviation in the next few months and we think this will contribute to further upside on the shares in the short to medium term. Many will have not been pleased with the numbers from the latest set of results, but these were to be expected in our view, as Rolls Royce is operating in a very tough area which has suffered considerably in 2020.

Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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