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Forget your usual New Year’s resolutions like exercising more, reading more books, or finally fixing up the garage. They are important, but right now my mind is on something else: buying dirt cheap Greggs (LSE:GRG) shares in my investment pension (SIPP).
Following heavy share price weakness, I opened a position in FTSE 250 baker back in november. And it still looks cheap to me, makes me think I should pick up more of its shares.
Historically cheap
At £28.02 per share, Greggs’ share price currently commands a forward price-to-earnings (P/E) ratio of 19.4 times.
That is a good distance above the FTSE 250 average of 14.2 times. However, it is well below the five-year average of 23.4 times for Greggs shares (excluding 2020, when the pandemic hit earnings).
I’ve been thinking about buying Greggs shares for a long time. The price drop in early October – caused by a cold market reaction to recent financials – encouraged me to finally hit the Buy button.
Strong Q3 numbers
Third-quarter numbers on October 1 showed like-for-like sales growth (at Greggs company stores) of 5% between July and September.
On the other hand, this was below the 7.4% increase in the first half of 2024. However, the third quarter numbers were still strong enough in my opinion, considering the strong comparison to last year. In the three months to September 2023, like-for-like sales rose 14.2% year-on-year.
In addition, the baker said that September “the strongest month of the quarter“, suggesting that sales will resume.
As Greggs further reduces inflation rates, I find the share price decline difficult to understand. The business said inflation for the full year was likely to be “towards the lower end of the 4-5% range mentioned earlier“.
Excellent returns
Since 2014, Greggs shares have delivered an average annual return of 19%. This includes capital gains and dividend income.
That is much better than that FTSE 100 and the FTSE 250 was delivered at that time. The total return from both UK indices is around 6%.
And I expect Greggs to continue to deliver market-beating returns. One of the reasons is that it plans to continue its successful store expansion program.
From about 1,650 stores just 10 years ago, the company had 2,559 on its books as of last count in September. It is also building capacity to increase the number to 3,500 in the next few years, which will include developing its location in potentially profitable areas such as railway stations.
I also like the baker’s growing focus on franchise stores, to help it control costs.
I expect Greggs’ share price to resume its strong momentum sooner rather than later. In fact, I think a repeat could happen as soon as next week (January 9) when Baker releases the fourth quarter trading numbers.
Market competition, inflation, and potential consumption problems as they increase all threaten future returns. But on balance, I think Greggs could be the best growth stock to buy in early 2025.
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