Greggs (LSE:GRG) shares have fallen a long way from their highs. But the consensus view among investors is that there might be more to come.
According to Research Tree, the stock has the second-largest short interest in the UK. So are things set to get worse for the FTSE 250 firm?
Short interest
According to the latest data, the short interest in Greggs is 13.8%. In other words, there’s around £219m betting against the share price.
Only one firm has a higher percentage of its shares being sold short. That’s Wizz Air – an airline that operates flights to the Middle East.
That’s about as wrong-place-wrong-time as it’s possible to be right now. But beyond that, the next consensus choice is the bakery chain.
A high short interest can be worth noting. It can create dramatic results if the share price suddenly starts moving up. In that happens, investors who were betting against the stock have to buy it to cover their losses. And that buying can force the price even higher.
That’s partly why Wizz shares were up 16% on Wednesday (8 April). But what could get the Greggs share price moving in the right direction?
Challenges
Greggs has been facing a number of challenges recently. And the problem is, there’s not much it can do about a lot of them.
In the UK, the firm is getting close to its saturation point. In other words, it’s not going to be able to open that many more stores. That means further growth is going to have to come from higher like-for-like sales. And that metric has been very weak recently.
A big reason for this is weak consumer spending in the UK. But that’s not something Greggs has any control over.
On top of this, higher energy and staff costs have been weighing on margins. And without revenue growth to offset this, profits are falling.
That’s an extremely unhelpful combination of factors. The big question, though, is how long it’s going to continue.
Value
The Greggs share price has been falling due to slowing growth. As a result, the stock is trading at a much lower price-to-earnings (P/E) multiple.
The underlying business, however, hasn’t really gone backwards. And that might make it interesting for long-term investors.
I think there’s actually a lot to like about the company. It offers outstanding customer value, which should have durable appeal. Not only this, but its scale means it has relatively low costs. So it’s able to make good money while charging low prices.
That’s clearly a good thing, but the question for investors is what that’s worth. And a P/E ratio of 13.5 is an odd middle ground.
It’s not high, by any means. But there’s still scope for this to compress further in the short term if results don’t improve.
What happens next?
The next update from Greggs is due in May. And investors clearly think there’s more disappointment on the way.
This could be true. But accepting that there are short-term challenges is consistent with thinking the company has long-term strengths.
On that basis, investors might well think the stock is one to keep an eye on right now. Especially those looking past the next few months.
