Will the Greggs (LON:GRG) share price keep rising?
UK-based bakery food specialist Greggs(LON:GRG) has been on a stellar run over the past year after issuing a series of positive trading updates and strong results. For the fiscal year ended 29th December 2018, Greggs saw its revenues increase 7% to £1.03 billion and net income increase 16% to £65.7 million.
As a result, the company, which has become famous for its immensely popular vegan-friendly sausage rolls, has seen its shares soar to record highs, but is this trend set to continue?
Finding stocks that can break-out and move higher on news updates is a tactic used by some of the world’s most successful traders. However, it’s not a black-box strategy…
Indeed, knowing the factors that drive relative strength in share prices can help you find profitable momentum trades, too. Let's take a closer look at Greggs as an example of how this can work.
How has the Greggs (LON:GRG) share price performed?
Greggs is a balanced, mid cap stock, which operates in the Restaurants & Bars industry. The company's market cap currently stands at £1.83 billion.
Over the past year, the Greggs share price has risen by 43.7%. When compared to the FTSE All-Share index, which is up slightly over the past year, after a tough second half of 2018, Greggs shares have a 1-year relative strength of 42.9%.
Read on to find out what the evidence shows may happen next...
Why relative strength really matters
Relative strength is a crucial tool in the armoury of technical traders and investors. It’s an instant measure of how a stock has performed in comparison with a benchmark.
And while there are no certainties about which way a stock will move next, research shows that price trends often persist.
Studies by Narasimhan Jegadeesh and Sheridan Titman, who are leading experts on momentum, show that stocks with the strongest price strength tend to keep up the pace for anywhere up to one year.
But what causes this?
The answer is that investor behaviour plays a big role. Academics point to two key drivers:
- Under-reaction - prices are slow to move up because investors are hesitant to bid prices higher in stocks that have already been on a strong run.
- Delayed over-reaction - investors chasing rising prices attract the attention of other investors, who follow them into those trades, pushing prices higher and higher.
So the answer is that momentum in stocks with strong relative strength is at least partly caused by a virtuous circle of human emotion. Investors have to constantly re-price these improving shares in their own minds.
It won’t always happen - and it might take some time - but when momentum takes over, it can push prices higher and higher.
What does this mean for potential investors?
Greggs is currently among the stocks with the strongest six-month and one-year relative price strength in the market. But momentum on its own is no guarantee of future returns.
To get a better idea about whether this momentum will continue, it's worth doing some investigation yourself. Indeed, we've identified some areas of concern with Greggs that you can find out about here.
About us
Stockopedia helps individual investors make confident, profitable choices in the stock market. Our StockRank and factor investing toolbox unlocks institutional-quality insights into thousands of global stocks. Voted “Best Investment Research Tools” and “Best Research Service” at the 2021 UK Investor Magazine awards.