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Which companies have Stocks and Shares ISA investors been buying in June? Rolls-Royce Holdings (LSE: RR.) was the most popular among Interactive Investor customers in the week ending 13 June, knocking BAE Systems off the previous week’s top spot.
Rolls-Royce also topped the buys and sells by value at AJ Bell, although BAE has fallen down that list.
Investors are buying into two companies big in the aerospace and defence business. It comes when the Middle East powder keg has well and truly ignited, and there’s no sign of an end to the war in Ukraine.
I rate these as two great companies and think long-term ISA investors should consider both. But I have to sound a note of caution.
Fear of missing out
It can make sense to buy into a sector when demand’s strong. And as defence spending has come more into focus, Rolls-Royce and BAE shareholders have done well.
But to some extent it’s a strategy of following where the market has already gone. The later in the trend we get aboard, the higher our chances are of buying near the top. And many people do seem to be hit by the fear of missing out when they see a soaring stock that they so far haven’t taken the plunge on.
How should we deal with bull runs like this? I think we should always base our decisions on whether a company’s stock valuation looks fair compared to its long-term prospects. And try to ignore popularity and share price charts.
We do however, need to be aware that the chances of a price correction increase the longer anything that looks like a bandwagon keeps rolling.
Civil aviation
Civil aviation demand’s growing after years of stagnation triggered by the Covid pandemic and the economic chaos that ensued. It put the boot in on new aircraft developments at both Airbus and Boeing.
At least one of those, and hopefully both, should be getting back on track. They’ll be looking for a whole new generation of aero engines, with Rolls-Royce at the leading edge.
We don’t yet know how profitable Rolls-Royce’s small modular nuclear reactor (SMR) division might be. But the UK government has just inked a contract as part of a £2.5bn programme.
Predictions
Predictions are difficult, but I’m going to try one. Some time in the (hopefully not too distant) future, more peaceful times will arrive and military conflicts won’t dominate the headlines. Civil aviation will be past its bust-and-boom years and back to boring normality, like it was for much of the past 50 years.
Rolls-Royce has a forecast price-to-earnings (P/E) ratio of 36, dropping to 27 by 2027. I don’t think that’s necessarily too high based on current growth expectations.
But is there enough safety margin to handle future calmer days with Rolls-Royce more at the back of investors’ thoughts? I do think growth investors could still do well to consider the stock.
But it’s too rich for this old investor’s risk-averse approach — even if I might keep missing buying opportunities.
