£20,000 invested in Greggs shares 1 year ago is currently worth…

Greggs‘ (LSE:GRG) shares are the perfect example of market exuberance getting ahead of a company’s tangible value. The stock surged to all-time highs in 2024, but traded at crazy multiples for a company that makes low-margin baked goods.

Over the past year, the stock’s slumped. It’s currently down 43% over the past 12 months. In other words, someone who invested £20,000 a year ago would now be sitting on just £11,400, although some dividends would have been received during the period.

In short, it would have been a pretty disastrous investment.

However, there are some clear lessons to be learned from such an investment. And it’s about focusing on a company’s valuation rather than following the crowd.

A year ago, Greggs shares traded at 18.9 times forward earnings and had a price-to-earnings-to-growth (PEG) ratio of 2.7. These are not strong metrics. A PEG ratio above one was traditionally a sign of an expensive stock. And accounting for the dividends and net debt, it still doesn’t look appealing.

Any investor considering Greggs shares a year ago should have taken a good looking at the earnings forecasts. These are compiled by analysts, and trust me, analysts can be wrong — but the consensus is normally fairly illuminating.

Estimates for the fiscal 2024 actually showed earnings going into reverse. The forecast for 2025 — which is obviously less accurate as it was another year ahead — showed a 10% increase in earnings — this turned out to be vastly incorrect.

What about now?

The big question for investors will be what about now? The stock’s certainly cheaper having fallen 43%. It now trades at 12.5 times forward earnings but, sadly, earnings are expected to fall 13.4% this year.

The PEG ratio — which I find the most telling — now sits at 8.9. That’s simply because the forecast offers almost nothing in the way of earnings growth.

Instead, Greggs needs to be thought of as a different kind of investment for the thesis to make any sense. And that’s a dividend-paying stock.

The yield now sits at 4.4% on a forward basis, rising slightly to 4.5% in 2026 — based on the current share price and payment projections.

With earnings stagnating/falling, I don’t think there’s much scope for the divided to increase too much. However, this 4.4% dividend yield and 1.8 times coverage isn’t too bad at all.

Worth a look?

Is it one to consider? For me, no. I think there are better opportunities to research elsewhere. I simply don’t see any catalysts that will take the stock higher other than a simple earnings beat — and that’s not clear at the moment.

What’s more, the government tried to back workers by increasing the National Minimum Wage. But coupled with higher employee contributions, low-margin business are feeling the pain. There could be more pain to come later this month.

The post £20,000 invested in Greggs shares 1 year ago is currently worth… appeared first on The Motley Fool UK.

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James Fox has no position in any of the shares mentioned. The Motley Fool UK has recommended Greggs Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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