Each morning during the working week, I sit down with a strong coffee and look at the top performers in the FTSE 250 to see what has caused the big moves. I also look at whether this spark is the beginning of a greater rally and can I jump on the bandwagon.
My task in all of this is to try to generate a positive and life-changing return on the funds I invest. Will I ever make as much on a stock as if I had won the National Lottery? No, I doubt that.
But here’s the thing — the odds of me picking a stock that could start and continue on a share price rally are considerably higher than ever winning the Lottery. Therefore, I would forget trying to get lucky on Lotto and focus my time instead on trying to pick the next Amazon while it is in its affordable stage.
With this in mind, I would take a look at Greggs (LSE: GRG).
Sausage rolls, not rollovers
Greggs is a well-known brand that sits within the FTSE 250 index. It sells a variety of bakery goods and food-to-go, and markets itself as the largest baker in the UK. Over the past year, the share price has increased nearly 53%, ranking it as one of the top 15 performers in the index over that time.
But one reason I do not think it has run its course is due to the brand loyalty and success the firm has built. That continues to yield results. If we are honest, it is just a baker/food-to-go outlet, like many others. But Greggs has managed to differentiate itself.
Take one example, the vegan sausage roll. Greggs saw a move towards veganism and launched its vegan sausage roll earlier this year. This has been one important part of why its total sales are up 13.4% year to date.
This contrasts sharply to the rest of the high street, which is struggling to perform. Greggs has been able to harness the vegan trend to differentiate itself from the competition and not only to retain market share, but to grow it from other bakers and food stores on the high street.
Too hot in the kitchen?
One concern I would flag to potential investors though is one financial ratio. Greggs trades at a price-to-earnings ratio (P/E) of 31.4. This is well above the UK average FTSE All Share P/E of 16.8.
Usually, a firm with a P/E ratio this high would be said to be overvalued, and it may be the case that the hype surrounding Greggs has seen the share price rise beyond the fundamental value of the company.
However, you can look at this and say the high P/E is justified due to high earnings expected. Indeed, Greggs commented recently that it expects to increase full-year profit guidance. This would support and justify the high P/E from my point of view.
It all leaves us with a company whose share price has grown more than three-fold in five years. It cannot rival a lottery rollover, that’s true, and that P/E looks expensive. But I think there is plenty of time to buy into Greggs now and ride with it as it continues to grow.
