Image source: Getty Images
Greggs (LSE: GRG) shares have been a diabolical investment. Over the last year, they’ve turned a £1,000 investment into around £500 (ignoring dividends).
Wondering what lies ahead for the shares? Well, if hedge funds are right, there could be further weakness on the cards.
Greggs is being targeted by hedge funds
One thing I always keep an eye on is the list of the most shorted stocks on the London Stock Exchange. These are stocks that hedge funds (sophisticated investors who trade in both directions) are betting heavily against.
Earlier this week, I was taking a look at the list and noticed that Greggs was quite high up on it (the sixth most shorted UK stock). At present, there are seven different hedge funds that have declared they’re shorting the stock (meaning that they expect it to fall).
What’s going on?
So what’s happening here? How could hedge funds possibly see more weakness ahead after a 50% share price fall? Well, trading updates from the company have been poor. For example, in July, the company told investors that first-half profit was down 14% year on year (it blamed the UK’s heatwave here).
A few months before that (in March), the company told investors that the Christmas period and the first nine weeks of the year had been weak. Here, it blamed consumer confidence and cold weather.
So I imagine the hedge funds expect Greggs’ next trading update to be poor as well. They probably expect consumer sentiment to have remained weak, putting pressure on the company’s sales.
Note that the trading update for Q3 comes on 1 October. So investors don’t have to wait too long to know how the company’s doing.
It’s worth pointing out that the nasty share price downtrend here could also have attracted short sellers (trends can stay in place for a long time). A lot of hedge funds today focus on the ‘technicals’.
My take on the shares
Personally, I don’t see Greggs shares as a short or a Sell today. Down 50% in a year, I actually think the stock’s starting to look quite attractive.
At present, it trades on a forward-looking price-to-earnings (P/E) ratio of 11.5 (assuming the 2026 earnings forecast is accurate and it may not be), which is a low valuation. Meanwhile, there’s a dividend yield of around 4.5% on offer.
That said, I don’t like to buy stocks that have heavy short interest. The reason why is that hedge funds tend to do their research.
Shorting’s risky business as losses are infinite, in theory (because a stock can keep rising forever). So these institutions only tend to bet against stocks they’re confident will fall.
Given the high level of short interest, I’ll be keeping the shares on my watchlist for now. I’m keen to see next Wednesday’s Q3 update though – this is likely to give us some insight into the prospects for the stock.
