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By the end of 2021 it looked like the Royal Mail (LSE: RMG) share price was well on the road to recovery. But so far in 2022 it has fallen by 35%.
Why the big drop, and should I buy now? There are other candidates for my cash, and RMG carries its own risks. But I think I could be looking at a great buying opportunity right now.
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Here’s what the RMG share price looks like over the past 12 months:
The bigger picture is more confusing, with large swings in both directions over five years. It’s surprisingly volatile for a FTSE 100 company providing what should be a safe and boring service.
Short-term movement
My key takeaway is that I’m not going to try to guess where the Royal Mail share price might go in the short term. But that’s not important to me. In volatile times like these, I firmly believe calm long-term investors enjoy great opportunities to buy top shares at good prices, and tuck them away for decades.
So why has the Royal Mail share price gone into decline in 2022? Part of it is the ending of pandemic restrictions. The shops are all open again, and we don’t have to get all our stuff by mail any more.
Sentiment vs fundamentals
Parcel delivery is what Royal Mail is all about, so a decline is not good. But did nobody see this coming? Clearly the pandemic was going to be over some day, and obviously people would go shopping for themselves again.
To paraphrase Benjamin Graham, short-term market movements are driven by sentiment, while long-term movements are based on fundamentals. Again, that’s something that long-term investors can profit from during times of stock market stress.
In this case, did short-term optimism push the RMG share price too high last year? And has a reversal in sentiment pulled it back too low now? I think the answer in both cases is yes.
Inflation
Post-pandemic changes aren’t the only things affecting Royal Mail. Escalating fuel costs and soaring inflation are hitting people’s pockets. Spending is being reined in, and that means less stuff being ordered for Royal Mail to deliver.
I come back to the sentiment thing again. What do I think will happen to inflation in the long term? I reckon it will settle back, close to its long-term trend, even if I don’t know when that will happen.
But surely, if I think Royal Mail’s volumes will recover from any 2022 setback, then I should make my investing decisions based on that. And not on how much pain we might see over the next few months. In short, I should put fundamentals ahead of sentiment.
Post-pandemic world
To me, those fundamentals still look good. Royal Mail might be seeing a fall in parcel volumes this year. But parcel revenue is still more than 40% ahead of 2019 levels.
So yes, there are clear risks facing the Royal Mail share price right now. But on balance, RMG is on my buy list.
