How the Greggs share price is responding to Brexit, and what I think investors should do

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EU and UK flag on broken wall

Business leaders are increasingly warning of a deep recession and shortages of medicines and other essentials, should we end up being dumped unceremoniously out of the EU without a trade deal.

But there’s one thing we won’t have to worry about. It seems Greggs (LSE: GRG) has been stockpiling pork, so at least our sausage roll supplies should hold out — I don’t know about the prospects for the vegan variety, mind.

My Motley Fool colleague Kirsteen Mackay took a look at the popular bakery’s third-quarter trading update Tuesday, and things looked fine — but we were warned that Brexit could put pressure on costs. The share price crashed 12.5% on the day, and I think that reflects a common phenomenon.

Valuation matters

I reckon it’s mainly down to the fact that Greggs shares command a high valuation, after multiplying in value 2.5-fold in the 12 months to July 2019. Yes, it’s that old growth stock bubble again, and the example of Greggs shows it doesn’t just happen to new tech stocks or the latest online darling.

Greggs has done a great job of revamping its offerings over the past few years, and we’ve seen earnings per share growing strongly — and there are further impressive rises currently forecast for this year and next too.

Soaring price

The share price was keeping pace with the new optimism, but the big surge since summer 2018 looks to me like it was driven by that fickle sort — bandwagon investors who buy into whatever’s going up. At July’s peak, Greggs shares reached a shade under 30 times forecast earnings. Just think about that, a P/E that’s more than twice the long-term FTSE 100 average, for a high-street bakery.

When I see this kind of thing happen, I get the feeling that shareholders are just waiting for the first less-than-perfect update to come from the company before they dump the shares. Is Greggs a good company? Yes. Is its stock worth its current P/E, now at 22? No. Not in my books anyway, and I think the next year or so will see a rebasing of the share price to a more sustainable valuation.

Brexit preparation

I opened this article with a whimsical pork observation, but what should investors really be doing to prepare themselves for Brexit? My answer might surprise you.

If you have the kind of portfolio that I think every long-term investor should strive for, then that answer is… nothing at all. That’s because a well-constructed portfolio will already be, by its very nature, defensive against the kind of havoc that Brexit might cause.

Think global

If Brexit crushes the UK economy, that will have very little effect on world oil prices and the value of Royal Dutch Shell shares, for example. And how will our leaving the EU, deal or no-deal, affect the success of GlaxoSmithKline‘s drugs development programme and its potential global sales? I don’t see any worry there either.

Most of the companies listed in the FTSE 100 are well diversified globally, and that builds-in protection from localised catastrophes around the world. I think it’s important to have that kind of diversification because, while things like Brexit might provide known unknowns that we can specifically protect against, I want my portfolio as safe as possible against unknown unknowns too.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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