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2 shares that I think might rocket if there’s a Santa Rally

Andy Ross
Stack of new bank notes

Greggs (LSE: GRG) has served up a treat for its shareholders for a long time. Over five years, the share price has leapt by 180%. Innovations such as vegan sausage rolls and a series of tasty updates have kept investors pushing the price of the shares up – until recently.

The shares had topped 2,400p in July. The share price now sits much nearer to 2,100p, showing the scale of the recent slump – despite a recent rise following a positive trading update.

The recent sell-off of the shares may present an opportunity if there’s a Santa Rally this year – typically December is a strong month for shares – although Brexit will have an impact this year in all likelihood.

What’s behind the fall

For me though there’s nothing I fundamentally worry about when it comes to Greggs. The sell-off looks to be the result of the shares becoming a bit more expensive, the CEO selling shares, and a Q3 update that wasn’t as strong as some might have hoped. This suggests Greggs is more a victim of its own success and shareholders were expecting too much rather than something more worrying.

The shares are still expensive – trading on a price-to-earnings ratio of around 29 – but given the recent dip in the share price I expect investors might tuck into the shares if the stock market rallies ahead of Christmas.

A cheaper option

The insurer Direct Line (LSE: DLG) is a far cheaper option that has also recently lost its way and could, therefore, be primed for a bounce in any Santa Rally situation.

The share price has fallen nearly 12% over the past six months. This has pushed the dividend yield up to 7.6% and the P/E to an attractive level at about eight.

Being cheap in itself isn’t enough of a reason to invest in the insurer ahead of a possible bounce back in December. Issues in the motor insurance industry I think are largely responsible for the share price decline. Competitor Hastings also has a high dividend yield and low P/E, indicating the industry is under pressure and showing Direct Line isn’t necessarily doing anything wrong.

Indeed, in its last set of numbers, the half-year results showed a better combined operating ratio – which insurers keep a close eye on – and £16.1m less of operating expenses versus H1 2018. The interim dividend was also raised by 2.9% but otherwise, the results didn’t paint the best picture – but this poor performance coupled with low investor expectations explains why the shares are trading on a low P/E.

Overall, I expect that both Greggs and Direct Line are well-positioned to see share price rises if there’s a Santa Rally this December. Both companies have struggled of late but this may make many investors see an opportunity to pick up the shares more cheaply than they would have been able to only a few months ago.

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Andy Ross has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Motley Fool UK 2019