As a long-term investor, a couple of months is nothing in the stock market. However, it’s still enough time for a stock to move noticeably and catch my attention. Take Greggs (LSE: GRG) shares, for instance. They’ve been sliding in recent weeks and this has alerted me to a possible buying situation.
But first, I want to know why this FTSE 250 stock has been creeping lower. Then I can asses whether I think the worry is warranted or it’s just the market being overly pessimistic. Let’s dig in.
Long-term market beater
The Greggs share price has fallen 16% in just the past two months. This means a £5,000 investment made in the middle of September would now be worth about £4,200 on paper. Not a great start.
However, the stock’s still up 29% over the past five years, before factoring in dividends. Over 10 years, it’s served up a 17.4% annualised return, thrashing the wider UK market in the process.
Perhaps that’s not surprising when we step back and think about the progress the business has made over the past decade. It’s changed its focus from just high street bakery to food-on-the-go, popping up in train stations, airports, petrol stations, and supermarkets.
The firm opened its first drive-through in 2017, launched cult hits like the vegan sausage roll (2019), and is now on Just Eat and Uber Eats. Earlier this year, it even overtook McDonald’s to become the UK’s number one breakfast spot. Dividends continue to head higher.
Meanwhile, there have been fashion tie-ups with Primark and various tongue-in-cheek initiatives like the new Greggs champagne bar, where sausage rolls can be washed down with Laurent-Perrier and Louis Roederer Cristal.
Why has the stock been falling?
The share price dropped 6% in a day earlier this month, and shareholders can thank Deutsche Bank analysts for that.
They crunched the numbers and found that the government’s plans to raise the minimum and living wages, as well as increase employer national insurance contributions, will have an outsized impact on Greggs. The firm employs over 30,000 people, after all.
The bank estimates these changes will cost it £45m in 2025 and £50m in 2026. To offset this, Greggs will have to raise prices or cut the bonus paid to workers (it distributes 10% of annual profits to employees).
The danger, of course, is that consumers don’t swallow any more price hikes, resulting in lower-than-expected sales. That’s a risk to profits, and so is the possibility of a global trade war sparked by Donald Trump’s proposed tariffs. Such a scenario would likely see inflation spike yet again.
I’m tempted
Despite these risks, I’m still a bullish shareholder. There were 2,559 Greggs shops in September, up from 1,650 at the end of 2014. It’s aiming for more than 3,000 and is on track to achieve this.
A big reason why I’m a Greggs shareholder is that I think the company’s loyal customer base and unique brand give it a durable competitive advantage. Such a dynamic enables the company to wield pricing power, where it adds a few pennies here and there to its food to maintain and grow profit margins.
Weighing things up, I’m sorely tempted to take advantage of the 16% dip to buy more Greggs shares.
This post was originally published on Motley Fool
