Shares in high street baker Greggs (LSE: GRG) have made a dismal start to 2016. They’re down by 23% year-to-date and are showing little sign of mounting a comeback despite the company releasing a positive update last month. This showed that Greggs is on track to meet full-year expectations and is set to continue its current strategy that has been incredibly effective at turning the business around in recent years.
Of course, a key reason for Greggs’ share price fall is its valuation. It had simply become too high given the prospects for the business. For example, Greggs is expected to increase its bottom line by a rather modest 6% in the current year. While this is in line with the growth rate of the wider market, Greggs continues to trade on a premium valuation. It has a price-to-earnings (P/E) ratio of 17.6 and while it’s a high quality company, further share price falls are very much on the cards until it reaches a more appealing valuation.
Although a halving of its shares may be excessive, Greggs seems to be a stock to avoid at the present time.
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Growth potential
Also making a poor start to 2016 has been Standard Chartered (LSE: STAN). Its shares have tumbled by 25% and a key reason for this is its focus on Asia where financial uncertainty is keeping investor sentiment pegged back. And with China continuing to undergo a less-than-smooth transition towards a consumer-focused economy, more pain could be on the horizon for investors in Standard Chartered.
However, looking further ahead, Standard Chartered has considerable growth potential. Even in 2016 it’s expected to increase its earnings by 28% and this puts it on a forward P/E ratio of just 8.8. For its current price level, Standard Chartered could realistically double since this would equate to a P/E ratio of 17.5. Given its growth potential in a Chinese economy where demand for credit is set to rise in future years, this could be fairly easy to justify. As such, and while Standard Chartered’s near-term performance is likely to be volatile, now could be a good time to buy it.
Down but definitely not out
Meanwhile, shares in technology company ARM (LSE: ARM) have also disappointed of late. They’re down by 13% since the turn of the year and part of the reason for this is concern regarding smartphone sales, with the Chinese slowdown impacting negatively on market expectations in the near term.
However, ARM is still forecast to increase its bottom line by 43% in the current year and this puts it on a highly appealing price-to-earnings growth (PEG) ratio of 0.8. This indicates substantial upside over the medium-to-long term and while ARM is undoubtedly becoming a more mature business as evidenced by its increasing dividend payouts, it also offers extremely impressive growth prospects. So while a doubling of its shares may be rather optimistic, ARM certainly has upside potential and seems to be worth buying right now.
