Profitable, growing, and well-known. As a business, Greggs (LSE: GRG) seems to have a lot going for it. Despite that, Greggs shares have been performing weakly of late.
Could that turn out to be a bargain buying opportunity from a long-term perspective?
Disappointing price performance
Over the past year, Greggs shares have fallen by 23%.
So someone who invested £10,000 a year ago would now be sitting on shares worth around £7,700.
If they do not sell them, that is only a paper loss – but it is still a disappointing performance.
Shares can help someone build wealth through dividends as well as possible price growth and Greggs does have a dividend yield of 4.3%. Given the lower share price a year ago, that means that a £10,000 purchase back then ought to be earning around £330 of dividends annually.
Still, even taking dividends into account, it has been a rotten year.
A common investing mistake
Something interesting to me is that, although Greggs shares have slumped, they do not seem be out of the woods.
The price remains well below where it was previously, without clear evidence of a sustained recovery yet on the share price chart.
On top of that, Gregg is one of the most shorted shares on the London market.
In laymen’s terms, that means that people are essentially offering to sell the share in future without owning it now, suggesting they expect it to fall even further from its current price.
I do not get involved in shorting. But I find it noteworthy that a lot of supposedly smart money seems to think there may be worse yet to come for Greggs shares.
A common mistake among small investors is not spotting what is known as a value trap. They look at once-successful businesses that have seen a share price fall and think they spot a bargain, whereas in reality the share does not get back to where it once did because the underlying business has changed.
Could that be the case for Greggs – and help explain all that shorting?
Here’s what I’m hoping
It could, but I am holding Greggs shares expecting that it will not.
Growth has started to slow – but Greggs remains a growing business.
Customer demand is resilient as people need to eat and a large percentage of them make their choice based on cost. Greggs has a value proposition that is very appealing and few if any rivals of anything like the same scale can match it, even if local competitors like Bayne’s are growing in some areas.
A profit warning last year that hurt the shares was triggered by Greggs getting its product assortment wrong in early summer. I see a risk that could happen again — but am hopeful that it may actually have helped the company improve its planning processes.
It can be hard differentiating between a value trap and a real turnaround story in advance. However, I remain upbeat about the long-term outlook for Greggs shares.
