Greggs‘ (LSE:GRG) shares have fallen over 50% from their all-time highs. And when that happens, it’s tempting to ask how much lower can the stock go?
That’s especially true when sales are growing – as they are with the FTSE 250 bakery chain. But this can be a dangerous way of thinking for investors to get into.
Valuation support
While Greggs’ shares have been falling, the underlying business has continued to move forward. Sales have kept growing and analysts expect this to continue in the years ahead. The growth’s set to be steady rather than spectacular. But the share price falling as revenues continue to climb means valuation multiples have been contracting sharply.
Sure enough, the stock’s gone from trading at a price-to-sales (P/S) ratio of 3.1 in 2021 to 0.78 now. And that’s why it’s natural to start wondering how much lower the stock can fall.
At some point, doesn’t it become too cheap to ignore and someone makes a move that sends the share price higher? Maybe, but there’s no rule saying that has to happen any time soon.
Still falling
Even in the last month, the stock’s down just over 5%. That doesn’t sound like much, but it’s enough to take £48 off a £1,000 investment.
Greggs’ shares might be trading below their intrinsic value at the moment. But even so, there’s no rule saying that they can’t fall further below this level.
That means investors shouldn’t just buy the stock and expect it to go up in the near future just because it’s cheap right now. That’s not how the stock market works. The stock was cheap a month ago and it’s still managed to find a way to go down another 5% since then.
But from a long-term perspective, the situation’s quite different.
Cheap stocks
When shares get cheap, there can be opportunities for investors. Companies can return a lot of cash to shareholders and that can make them very attractive. Some companies do this via share buybacks. Greggs, on the other hand, distributes its cash to shareholders directly, in the form of dividends.
A falling share price means there’s a 4.5% dividend yield at the moment. So investors stand to get paid quite well as they wait for the stock to recover from its recent collapse.
Exactly when that will happen is hard to say – weak consumer spending and rising costs are still challenges. But the firm’s scale advantage makes it an interesting one to consider.
What comes next?
Greggs’ shares are significantly better value than they were five years ago. But as investors have been finding out, that doesn’t mean they can’t keep falling from here.
The way to deal with this situation is to avoid focusing on what the next move will be. Instead, it’s to look at where the company will be in 10 years or more.
In the short term, the share price might go up or down. But over the long term, it’s likely to reflect what happens with the underlying business. At today’s prices, I think there’s a lot of room for optimism on this front. So my view is that it’s worth considering by investors looking for stocks to buy at the moment.
