Greggs‘ (LSE:GRG) shares have been a poor investment in recent years. Had an investor put £5,000 into the food-on-the-go company two years ago, they’d now have about £2,950 (ignoring dividends).
Is it game-over for this once-legendary FTSE 250 stock? Or could a recovery be on the cards?
Growth has stalled
Greggs is a solid business. Not only does it have a strong brand and market position but it’s typically quite profitable.
However, looking at the stock today, I see a few red flags. The first is that growth has really slowed. For the first nine weeks of the year, for example, like-for-like sales growth was only 1.6%. That’s pretty underwhelming.
I think Greggs is facing two main issues here. One is that UK consumers are strapped for cash (the recent spike in oil prices isn’t going to help). The other is that GLP-1 weight-loss drugs (eg Mounjaro and Wegovy) are starting to have an impact on consumption trends. These drugs appear to be reducing demand for its high-calorie steak bakes, sausage rolls, and sweet treats.
You could also argue that there hasn’t been enough innovation in its product menu. Greggs has added some healthier options recently but, to my mind, its offer is a little stale overall.
High short interest
Looking beyond the business performance, another red flag is short interest (the percentage of the group’s shares that institutional investors are betting will fall). Right now, it’s really high at 12.5%.
Today, Greggs is one of the most shorted stocks in the UK, with 13 funds betting against it (there are probably more as institutions only need to report short positions greater than 0.5% of the float to the FCA). This tells us institutional sentiment’s very bearish.
Obviously, many institutions expect the stock to keep falling. Perhaps they expect upcoming trading updates to be poor?
It’s worth noting that short sellers don’t always get things right. But it’s concerning when lots of different funds are betting against a stock.
Broker sentiment
One other thing worth mentioning is that broker sentiment’s cooled. For example, analysts at Jefferies recently downgraded the stock to Hold from Buy and cut their price target from 2,500p to 1,610p (roughly where the share price is now).
“We are increasingly of the view that rapid uptake of GLP‑1 weight‑loss drugs is impacting Greggs”.
Analysts at Jefferies
This isn’t going to help the share price. Earnings downgrades and price target cuts can really put pressure on a stock.
Can they recover?
Now despite all these negatives, I don’t think it’s game over for Greggs. There’s definitely scope for a recovery at some stage. If interest rates and oil prices were to fall, consumer spending could pick up. Meanwhile, if the company can roll out some more exciting/healthier food options, it could see increased interest.
If business performance was to improve, the shares could rally. Because the valuation is relatively low today. At present, the forward-looking price-to-earnings (P/E) ratio is only 12. As for the dividend yield it’s about 4.5%.
I just don’t think now’s the best time to consider buying though, given the high level of short interest. In my view, there are safer stocks to pursue today.
