Back in 2012, I bought a few shares in Greggs for 485p. To me, it looked like a solid, relatively defensive company with a good track record of dividend growth and an attractive near-5% dividend yield.
Fast forward to late 2014 and I decided to sell my shares in Greggs at 599p, largely because the shares were no longer obviously cheap. I’d made almost 30% in two years and I wanted to invest in other companies that were trading at more attractive prices.
But of course, the market is a funny thing and what one person thinks is expensive (599p) another thinks is cheap. As I got out, Greggs’ share price increase sucked in the “momentum” crowd, those investors who buy whatever’s going up, and they continued to drive the price up and up and up.
Today the shares stand at almost 1,200p, twice the price I thought was about fair value. At today’s level, the company’s shares have:
- Dividend yield = 2% (FTSE 100 = 3.4%)
- PE10 (share price to 10 year average earnings) = 31 (FTSE 100 = 16.3)
- PD10 (share price to 10 year average dividend) = 63.3 (FTSE 100 = 34.6)
In every way the shares are more expensive than average, implying that investors think Greggs is substantially better than the average company. In fact, those multiples assume that Greggs is in the same league as Sky, Reckitt Benckiser, Next and other companies that have been extremely successful over prolonged periods of time.
I’m not remotely convinced that’s right. I think Greggs’ share price could have a long way to fall if the company even slightly disappoints the market…
The rest of this blog post was originally published on the Bull Bearings website which sadly no longer exists.
Your seeking alpha article just out re Greggs is a disgrace. Why don’t you mention in it that you sold Greggs @ £5 in October after making 30% in 2 years? You missed a 140% gain in 6 months doing that. Of course you wouldn’t want to buy them for more that £6 now, that’s still more than you sold them for 6 months ago!
http://seekingalpha.com/article/2547285-case-study-investment-in-greggs-plc-shares-returns-30-percent-in-less-than-2-years
A disingenuous article jaded by a massively poorly timed sell on your part imo.
Yours
Richard Crow
Hi Richard, I don’t think there was a particular reason why I didn’t mention my previous investment in Greggs. My existing knowledge of the company was the reason I wrote the article, but my exact buy and sell prices were’t the point, so they weren’t included. There certainly wasn’t any sort of Machiavellian intent.
Unfortunately (or perhaps fortunately) the market is random and any company can trade on a wide variety of valuations at any given time. Investors and traders have many different strategies and ideas of where a stock price “should” be, which is why they bounce around so much.
I sold Greggs at 599p in October 2014 because at the time the share price was moving towards what I would consider “fair value”, although it was still a long way below it. I sold because I don’t want to own shares that I think are at “fair value”; I only want to own stocks that appear to be incredibly good value.
Since then the company’s results have improved, increasing its intrinsic value, but a price of 1,200p is, in my opinion, above fair value.
The sale would only have been “massively poorly timed” if a) there had been an element of timing in it and b) if I had some inkling of what the future share price would be, but neither of those is true. I make zero effort to time my decisions and I have no idea what the share price of any company will be tomorrow, next week or next year. I simply buy when they look cheap and sell when they don’t. What happens to the share price after that is out of my control.
John
Your comments re the PE above are also incorrect . Canacord are forecasting 64p eps for 2017 – a 2017 PE of 17.8 for earnings growth of 35% in two year and near doubling of earnings in 4 years. You’re comparing Greggs to Sky on a PE basis – how does the debt compare between the two co’s? I’ll tell you, Greggs are net cash,
Greggs are payind special divi’s – 20p in July and there’s likely to be more going forward so the yield is better than the headlines suggest.
Forecasts are rising sharply too, another reason why investors are buying as they see the forecasts being increased further, eroding that PE more.
A completely lopsided article on ‘seeking alpha’ in my opinion
Hi Richard, the PE mentioned above is PE10, which is the share price compared to the average earnings over 10 years, rather than the standard PE. I also don’t use forecasts, although the figures you cite from Canacord certainly highlight some of the reasons why Greggs is currently in favour.
I guess that you’re a shareholder, in which case I hope the company does double its earnings and its share price in the next few years as Canacord suggest.
Yes, I am a holder from Sep/Oct with 100% gain in that time. My point was anyone reading your article can’t get a balanced view unless you point out you sold in October. Human nature is to feel miffed at selling before a rise like that which would have added circa 150%+ to your initial investment price had you maintained your position.
With profit growth of 40%+ and a fwd PE of 17.5 the PEG is well below 1 and the PE still in-line with that of the sector average while growth is far in excess of average – not accounting for net cash and special divis.
@ £6 where you sold, you actually sold a stock that was on a fwd PE of below 14 paying a near 4% yield and special divi worth another 3.5%. If that was put in your article then investors might have a balanced view imo.
John, You are well ahead of the game here.
The FD obviously has read your report and promptly offloaded £500K’s worth of stock.
http://www.digitallook.com/news/dealings-round-up/greggs-finance-director-raises-05m-from-share-sale–714535.html
LR
It appears that my influence knows no bounds.
OK hands up — I better take another look at Admiral 🙂
Incidentally were you happy with HSBC’s results and the market reaction?
LR – enjoy the evening’s pre-election entertainment.
I don’t own HSBC so I haven’t followed its results in any detail, nor the market reaction. Like a lot of value investors I try to hole myself up in a basement far away from the maddening crowd, all the better to filter out the noise…