UK Edition
Questor: it’s time to sell Greggs, an unexpected victim of the rise in online shopping
It’s almost an obsession among professional money managers: the fear that the clever use of technology by a new generation of “disruptive” companies will put whole swathes of currently profitable businesses in jeopardy.
Questor has spoken to several fund managers in recent weeks who say this threat influences all their thinking and all their investment decisions.
Sometimes the effects of technology-driven changes in consumers’ behaviour can ripple as far as businesses that at first sight you would expect to be safe.
One example is Greggs, the fast-food chain, which we most recently tipped as a “hold” in June last year at £11.02.
The fear among many fund managers is that the rise of online shopping will cause such a severe decline in the number of people who visit shopping centres and high streets that sales will fall not just at the obvious targets, such as electronics stores, but also at any outlet that depends on passing traffic.
In other words, if enough shoppers buy their clothes, groceries and gadgets from Amazon, Tesco, Asos and other online shops, they will no longer have any need to visit the locations served by fast-food outlets such as Greggs.
The quality and value of Greggs’s actual offering will have no bearing on this – the chain will simply be the victim of a profound shift in people’s shopping habits.
This shift must be at least partly to blame for the firm’s profit warning earlier this month, which left the shares about 15pc lower on the day.
Greggs has a strong management team that is seeking to reduce its dependence on the high street by tilting its store portfolio towards stations, airports and the like. None the less, its days of heady growth now seem to be over, and this casts doubt on its current valuation.
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The shares, even after the recent fall, trade at about 19 times 2017 earnings. Some brokers have suggested that profits this year will be lower.
The combination of high multiple, falling profits and deeply rooted and damaging shifts in customer behaviour seems an alarming one. Our advice is to sell, even if it means locking in a regrettable loss of 4.5pc.
Questor says: sell
Ticker: GRG
Share price at close: £10.52
Update: Tesco
There is better news at Tesco: its decision to close the loss-making Tesco Direct business is likely to be beneficial for shareholders.
James de Uphaugh, manager of the Majedie UK Equity fund, in which Tesco is a top-10 holding, said: “The decision fits with the strategy of refocusing Tesco’s general merchandise offer on products where it has an edge, such as its new cookware range.
“Tesco Direct had been loss-making for a decade and had not been integrated with the main Tesco.com website. This is a sensible move.”
Questor says: hold
Ticker: TSCO
Share price at close: 245.5p
- Read Questor’s rules of investment before you follow our tips
Update: Capita
Capita’s rights issue, discussed here two weeks ago, is now complete. We explained then why the severe share price fall on the day the new shares were created did not mean a loss for investors but, now that the rights issue is complete (the new shares started to trade on a “fully paid” basis last Friday), investors (Questor included) need to know how to tell from day to day whether they are in the red or the black.
It is no longer a question of simply looking to see if the current share price is above or below the one you paid. We asked Capita itself how to do the sums.
First, multiply the current share price by 2.5. Then deduct from this figure the price you paid plus 105p (which is 1.5 times the rights issue price of 70p).
For example, the shares closed last night at 139.4p. Multiplying this by 2.5 gives 348.5p. Questor tipped the shares as a “hold” in October 2016 at 669p. Adding 105p gives 774p. We deduct this from 348.5p to arrive at a loss of 425.5p. The percentage loss is 425.5/774 or 55pc.
Simply comparing 669p with 139.4p would incorrectly give a loss of 529.6p or 79.2pc.
Questor says: hold
Ticker: CPI
Share price at close: 139.4p