- Sales growth still pedestrian despite improvement in trading
- Greggs is one of the UK’s most shorted stocks – today’s rally is partially a short-squeeze
- There remain fears it has grown too fast
- Budget could intensify headwinds for the business
Dan Coatsworth, head of markets at AJ Bell, comments:
“The fact life hasn’t got any worse for Greggs was enough to breathe some life into the share price. It says trading has improved over the past few months, it is getting cost pressures under control, and full-year guidance has been maintained.
“Don’t be fooled into thinking the king of sausage rolls is sitting upright on its throne, with nothing to worry about. The share price jump is a mixture of relief and a short squeeze, not a celebration of significant progress.
“Like-for-likes sales are still pedestrian despite ongoing product innovation that should have drawn in the crowds. There is a nagging feeling that Greggs is growing too fast in the face of fierce headwinds.
Heavily shorted
“There is a reason why Greggs is the seventh most shorted stock on the UK market. Hedge funds like Marshall Wace and ExodusPoint have bet against the company, hoping to profit from a falling share price.
“If Chancellor Rachel Reeves tinkers with tax rates at the Budget, there is a risk consumer confidence will deteriorate, and spending weakens.
“Greggs is a discretionary spend – people don’t have to buy pastries and coffees on the way to work or sandwiches for their lunch. Commuters can easily bring items from home to get them through the day, a situation which could be disastrous for Greggs.
“There is also the risk that growing use of weight-loss drugs leads to reduced demand for sweet treats and sausage rolls.
What’s a short squeeze?
“Short selling involves borrowing shares from someone else and selling them on the open market. If the shares decline in value, the short seller buys more stock at the lower price to give back to the original lender and then pockets the difference.
“A short squeeze occurs when the target company issues enough good news to push up the share price. In this situation, those betting against the company buy back the shares to cover their short or they deposit more funds into their account in something known as a margin call. The former might explain the double-digit spike in Greggs’ share price at the market open.
“The big question now is whether certain short sellers wait for the dust to settle and double down on their bets against the company.”
