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Rolls-Royce has been one of the best UK investments over the past five years but I think the stock’s future is questionable. Risk-averse investors with a long-term vision may prefer a reliable FTSE 250 investment trust with stable growth potential.
There’s no denying Rolls’ shares have been on an absolute tear. They’re up almost 500% in the past two years, far outperforming any other stock on the FTSE 100. But growth like that is seldom rational or sustainable.
As it continues to skyrocket, the chance of a correction becomes more and more likely.
Upcoming results
Next Thursday (27 February), Rolls will announce its full-year results for 2024. It’s expected to achieve underlying operation profit ranging £2.1bn-£2.3bn, with free cash flow of £2.1bn-£2.2bn. It also plans to reinstate dividends, starting with a payout ratio of 30% of profit after tax.
All that is great and if it comes to pass, the stock could climb even further.
The risk is that if it fails to meet those expectations, investors could be spooked and the stock could take a dive. With limited new buyers left to prop up the price, the losses could be significant. That’s maybe why analysts are increasingly bearish, with an average 12-month price target of 632p — 1.4% down from today’s price.
A more reliable, low-risk option?
Don’t get me wrong, Rolls is a great company that’s in a great position to keep performing well. But historically, its price has been volatile and is currently in a precarious position.
When thinking long-term, I find consistent and sustainable growth more attractive. For that, investors may want to consider JPMorgan American Investment Trust (LSE: JAM), a US-focused trust that’s delivered consistent returns for decades.
Since 2005, the share price has grown at an annualised rate of 12% a year. At the same time, Rolls has grown at an annualised rate of 10% a year. And since the JPMorgan trust is highly diversified and less prone to volatility, I’m more confident it could maintain that growth.
Stability through diversity
The fund’s top holdings are unsurprisingly dominated by US tech stocks. In fact, 25% of the fund is made up of just five stocks: Amazon, Microsoft, Meta, Nvidia and Apple.
Further down are some finance stocks like Capital One, Berkshire and Loews. All told, the portfolio’s made up of 283 holdings from around the world, spanning 11 different sectors. The level of diversification helps to ensure stable growth with low volatility.
Over the past three, five and 10 years, the fund’s annualised share price growth has consistently outperformed its net asset value (NAV).
Risks to consider
When looking at any stock, it’s important to consider the risks. While this trust has generally favourable reviews, that alone doesn’t mean it’s a good buy. When it comes to investment trusts, the risks tend to be related to how the portfolio’s balanced and managed.
Since JPMorgan American’s heavily weighted towards US stocks, an economic downturn in the States would affect it. In the same vein, any currency fluctuations between the US and the UK could have an impact on returns.
Despite these risks, I would be surprised if it underperformed Rolls-Royce over the next five years.
