Over the long term, Greggs (LSE: GRG) shares have been a phenomenal investment. Over the last decade, for example, they’ve nearly tripled in price (and paid dividends).
Recently however, the shares have experienced some weakness. An investment in them six months ago would now mean sitting on quite a large loss.
The shares have tanked
On 12 July 2024, Greggs shares closed at 2,902p. Let’s say that an investor bought £5,000 worth of shares at that price. That would have got them 172 shares. The total outlay (ignoring trading commissions) would have been around £4,991.
For a while there, they would have been pretty happy as over the next few months, Greggs’ share price rose. On 20 September, it hit 3,250p, meaning the investor would have been sitting on a gain of 12%. In monetary terms, they would have been up roughly £600. That would have been a great result in a little over two months.
Since then however, Gregg’s share price has fallen sharply. On Friday (10 January), it closed at 2,082p – 28% lower than the closing price on 12 July. This means the investor’s capital would now be worth just £3,581. In other words, they’d be sitting on a capital loss of about £1,410.
It’s worth pointing out that the investor would have received a dividend payment over the period. This would have only been 19p per share though. Given that they held 172 shares, that equates to a payment of just £32.68. So it wouldn’t have made much of a difference.
The importance of diversification
For me, these calculations really highlight the importance of portfolio diversification when investing in stocks. Greggs isn’t a bad business. In fact, history shows it’s quite good (and could be worth considering as a long-term investment).
But every business can experience a slow down in growth at times. And that’s what has happened here recently.
For the fourth quarter of 2024, Greggs posted underlying sales growth of just 2.5%. That was well below the level of 5% it recorded in the previous quarter, suggesting that appetite for its famous steak bakes and sausage rolls has declined.
Given that the shares were priced for growth with a relatively high valuation (a price-to-earnings ratio in the 20s), this slowdown’s had a major impact on the share price. Last week, the shares fell more than 10% in a day.
Now, if the investor owned 20 different stocks, the share price weakness here since 20 September may not be a big issue. Their portfolio may have still performed reasonably well as global markets have risen over this period.
But if they only held a handful of stocks (up to five different companies), the share price collapse could have had a substantial negative impact on their returns. With a small portfolio, a big loss on one stock can send the whole portfolio down.
This post was originally published on Motley Fool
