Over the course of decades, Greggs (LSE: GRG) has baked up some tasty treats for long-term shareholders. More recently, though, the Greggs share price has sunk like a poorly prepared soufflé.
What’s been going on – and is this a potential bargain, or perhaps a value trap?
Value destruction
Over the past 12 months, the Greggs share price is down by 22%.
The past half year has shown some recovery: it is up by 4% during that period. Indeed, since late November the Greggs share price has moved up by 18%.
Still, that 12-month price loss is painful. It means that someone who invested £5,000 a year ago would now be nursing a paper loss of around £1,100, so their stake’s current value would be down to about £3,900.
There have been dividends along the way.
The current yield is 4.1%, though someone who bought at the higher price 12 months back would be earning a lower yield. £5,000 invested a year ago should have generated roughly £161 of dividends since.
Even taking that into account, then, the investment would still be deep in the red.
Any lessons?
In a moment I will explain how I have reacted and what I think could happen from here.
But first I think it is worth noting a couple of observations relevant to an investor even if Greggs shares are not on their radar.
One is the importance of diversifying a portfolio.
A 22% drop in the Greggs share price is significant. But say Greggs was just one of ten evenly weighted shareholdings in different companies an investor held. Then, such a drop would amount to a fall of a little over 2% in the whole portfolio valuation.
Another point worth remembering is that, no matter how cheap a share may look, it can still move lower.
A year ago, the Greggs share price was already 37% below where it ended 2021 and may have struck some investors as a bargain. But look at what has happened to it since!
Still unclear where this might go
So, what is the situation now?
I am in the camp that the beaten down Greggs share price is a bargain. So I have built up a position in it. I did sell a few recently to help keep my portfolio diversified, but I still own the majority of my stake.
I like the company’s proven business model, strong value proposition for customers, economies of scale, and exposure to an area with ongoing customer demand.
But those things were all true a year ago – yet the share tanked.
Partly that was because of a profit warning last summer. Poor demand planning given the weather that materialised not only hurt performance, it also shook City confidence in management.
I see getting the product offering wrong as an ongoing risk. I reckon investors are also worried about market saturation eating into the business’s growth potential.
But Greggs is still growing sales. I think the current share price is attractive — and the dividend is tasty too!
