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When Greggs (LSE:GRG) shares were trading above £30, I couldn’t believe it.
Either I was missing something, or as I suspected, retail investors were just following the money. The stock has been trending for a while and everyone knows the company – there seemed to be momentum. Sounds like a great opportunity right?
The problem is not how the stock market works. And it’s common for retail investors, especially new ones, to burn their fingers.
The good thing here is that we can all be better investors.
My first investment was in Crest Nicholson and it turned out that he was poor. The problem was there was no value-based thesis behind it.
More than a decade later I can say that only two stocks I have held for more than six months are in the red. Seven of the 20 have at least a double value.
Okay, back to Gregs. Is it time to consider stocks?
It starts with measurement
Shares now trade at about 12.7 times forward earnings. That’s below the average index, but everything has context. Total debt is now equal to about 25% of the market average. Adjusted for total debt, the stock trades at close to 16 times earnings.
But what about growth? However, the medium-term forecast does not suggest much growth ahead. And that’s why the price-to-earnings-to-growth (PEG) ratio stays around nine. In context, a good PEG ratio is less than one. The caveat is that the PEG ratio can be easily swayed when the growth forecast is close to zero.
That said, the dividend yield is compelling. Going forward it stands at around 4.3%, although the coverage ratio (how many times it can pay dividends from income) has fallen to 1.83 times. A ratio of more than two is more secure.
What does all this data tell me? Well, it doesn’t scream neglect.
Working in this area is not easy
Gregs has a great product range. We all know about it and it’s hard to miss the highway with that blue and yellow color. The company has been using this for years, increasing the number of its stores significantly. Now there are more than 2,600 in the country.
Well, let’s face it. Britain’s high street is not an easy place to work. Energy costs are the highest in the world, labor costs are through the roof, and the economy is not firing on all cylinders.
Plus, GLP-1s don’t help Gregg’s carb-heavy menu. As weight loss drugs such as Govy again Ozempic increasing in popularity, consumers’ desire for high-calorie snacks may change.
Gregs is trying to cater to this health conscious audience, but my guess is that the sausage maker would not be the first port of call. That doesn’t mean it won’t succeed here, I just didn’t expect it to contribute satisfactorily to the company’s performance.
Putting all this together, it’s just not enough to keep me entertained. And honestly, I think there are better opportunities to be considered.
