Benjamin Graham, the investment legend, wrote in his 1949 classic The Intelligent Investor: “The intelligent investor is a realist who sells to optimists and buys from pessimists.”
It seems to this column that there is no shortage of pessimism around right now, especially as local lockdowns are imposed and public faith in flip‑flopping government policy regarding how best to handle Covid-19 appears brittle at best.
The application of Graham’s maxim would therefore suggest that there could be a few bargains to be had in the London stock market, at least for those who are patient and willing to take a few knocks along the way.
One firm to catch the eye in this context is Greggs, the sandwiches to sausage rolls seller, not least because its shares are no higher than they were in 2015. It is easy to see why its shares are under pressure.
The FTSE 250 firm’s shops were shut for most of the second quarter thanks to the pandemic and the nationwide lockdown, while management has reined in its store opening plans and the first-half results showed a pre-tax loss. In addition, the company passed its interim dividend.
Moreover, a nascent recovery after the carefully managed reopening of the estate from July onwards is now at risk. The Eat Out to Help Out scheme in August lured customers elsewhere and local lockdowns have been proposed for several cities and regions across Britain.
Greggs is responding. It has managed costs by limiting sales ranges (although they are expanding again) and is opening new shops where access by car is easy. It also now offers a click-and-collect service. The nationwide delivery partnership with Just Eat continues to develop. Unfortunately, some shops have been closed and some staff put on to a consultation process.
It seems more than likely that restrictions on movement and social gatherings will again hit trading and hence financial performance, especially as the nascent delivery business represents less than 3pc of in-store sales.
But Greggs has the balance sheet to come through the tough times. Excluding its lease liabilities, it had net cash at the end of September.
Neither should investors forget that it was only a year ago that Greggs was racking up 91p in earnings per share and paying a 35p-a-share special dividend on its way to what would have been a total distribution for the year of nearly 80p a share.
If you were to offer those figures now, the shares at about £13 would look interesting. Granted, analysts think it may take until 2023 for profits to get back to 2019’s levels.
But that is not a long time from an investment perspective. The balance sheet should provide support and it may not take much for the company’s performance to deliver some pleasant surprises given the prevailing gloom. Investors will have to be brave and patient but it may be worth stocking up on Greggs. Buy.
Questor says: buy
Share price at close: £13.18
This column rarely gets involved in the dark arts of technical analysis, where inspiration can be drawn from the share price chart, but the picture at DCC is intriguing none the less.
This is because shares in the energy, healthcare and technology distribution specialist have broken down for no apparent reason – a trading statement in July offered nothing particularly untoward.
The slide in the share price at least supports our cautious stance towards a stock that we elected to avoid in early 2018 when it was trading at almost £70.
This is not to say we can begin a victory lap or claim any rare insight – while the shares may be down by 24pc since our initial analysis, the FTSE 100 index has fallen by 18pc – but it may reflect our concerns over valuation.
A forecast price-to-earnings ratio of about 16 and a yield of 2.8pc for 2021 still represent a premium and a discount to the FTSE 100 respectively, even though organic growth rates in the underlying business are probably in the mid-single digits at best.
The valuation is less lofty but still does not appeal.
Questor says: avoid
Share price at close: £52.30
Russ Mould is investment director at AJ Bell, the stockbroker
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