Does the soaring Rolls-Royce share price mean it’s finally time to sell?

The Rolls-Royce Holdings (LSE: RR.) share price just hit yet another all-time high. The shares are up 95% in a year, and 600% in five years. And when we try to decide if and when to sell, we can be faced with contradictory ideas.

Run the winners and sell the losers, that’s what some people urge. But doesn’t that mean we’ll get sucked into every bubble that comes along? So, maybe hang in and sell at the top? Well, nobody ever tells us when the top’s here, do they?

And if we always sell fallers, that could be a big mistake too. Wasn’t it billionaire investor Warren Buffett who suggested we should want prices to drop if we intend to be a net buyer?

Take profits?

It’s never wrong to take a profit, goes the opposite suggestion. Wouldn’t that have tempted people to sell Rolls-Royce shares a year ago and bag a fat 300%? Those who didn’t have since seen their shares double again.

Reasons to sell

Knowing when to sell is probably the hardest part of stock market investing. A key driver for me is when I think something’s changed and a company might be running out of steam. And I mean what the business is doing, not the share price.

At May’s AGM, CEO Tufan Erginbilgic spoke of “confidence in our guidance for 2025 of £2.7bn-£2.9bn of underlying operating profit and £2.7bn-£2.9bn of free cash flow.” He did point to tariff uncertainty as something to be wary of. But Rolls isn’t going off the boil as far as I can see.

Diversification can be a good reason to consider selling. If a stock later falls, we can suffer less pain if it accounts for a modest proportion of our investments. Investors who bought Rolls five years ago in what was then a diversified portfolio could be looking at an unbalanced spread now.

Some will be happy with that. But I prefer to sacrifice some growth opportunity to offset the risk. So I’ll trim my holdings of any stocks that start to dominate.

Another reason is that selling shares can be an attractive option if we need some cash. The best scenario I can think of is approaching retirement with an ISA or a SIPP (or both) bulging with the rich proceeds of a life of investing — and wanting to shift to taking some income.

Valuation

What if we see a better investment opportunity for the cash? That can be a good time to consider selling something we already hold. And it brings me to my two key deciders: strategy and valuation.

At Rolls we’re looking at a forecast price-to-earnings (P/E) ratio of 37, falling to 27 by 2027. That’s not necessarily too high for a stock with strong growth prospects, especially with rising net cash on the books. Those pursuing a growth strategy might even consider buying now.

Looking for income from high-yield dividend stocks? Investors with that strategy are unlikely to hold Rolls-Royce anyway.

The hardest decision is for value investors who saw an unjustified low price in 2020, who now have to decide when enough is enough.