Greggs‘ (LSE:GRG) shares remain one of the UK’s least popular stocks to buy. Looking at the company’s share price performance over the last five years, this maybe isn’t a surprise!
At £14.95 per share, the FTSE 250 stock’s fallen 31% in value over the period. Incredibly, it was trading as over £30 a share a little over 18 months ago. So what’s gone wrong?
In a nutshell, weaker sales growth caused the market to reassess its premium valuation, sending its shares tumbling. Greggs’ share price drop since April 2021 means £5,000 invested back then would be worth just £3,435 right now.
Dividends of £80 in that time would have taken the edge off, but not by much. The question is, can the sausage roll merchant bounce back and start delivering delicious returns again?
Short shrift
If you ask institutional investors, you might not like what you hear. This is because Greggs is currently the second-most-shorted share on the London stock market today. According to shorttracker.co.uk, 13 funds are betting that the stock has further to fall. A whopping 12.8% of Greggs’ shares are currently shorted.
Judging by most recent retail data, it’s easy to see why. British Retail Consortium (BRC) research showed consumer views on the UK economy topple to -53 in March, the lowest on record. Furthermore, the BRC’s survey showed respondent’s opinions on their personal finances drop to -17, another all-time trough.
The conclusion is things could be about to get a whole lot tougher for Greggs. It might sell its pasties, pies and sweet treats at cheaper prices than the competition, but as we’ve seen in recent years, this hasn’t stopped sales growth cooling when consumers are feeling poorer.
Holding on
I’m not expecting a pick-up in Greggs’ fortunes (or its share price) any time soon. And I say that as a shareholder. So why am I still holding the baker in my portfolio?
Over the longer term, I expect the strong sales growth we saw before 2024’s downturn to resume, supercharging the share price. I’m confident for a number of reasons. A doubling-down on the delivery and evening markets is yielding terrific results and has more to produce. Later-hours trading is currently Greggs’ most lucrative time of the day.
A more targeted approach to store expansion also bodes well for the company’s recovery. It’s built the infrastructure to support more than 3,500 stores, up from around 2,700 today. And expansion will be focused on high footfall areas like transport hubs with formats such as its ‘Bitesize Greggs’ smaller shops.
Why buy Greggs shares?
But is this enough to encourage investors to buy Greggs shares? Perhaps not. But it might when you also consider how low the company’s valuation now is.
The forward price-to-earnings (P/E) ratio is 12.3 times. To put that into perspective, that’s far below the 10-year average of 22-23. If Greggs’ sales pick up when consumer spending recovers, that low valuation could provide the base for a stunning share price rebound.
