eyeQ: 10 actionable trading signals for week beginning 4 March 2024

"Our signals are crafted through macro-valuation, trend analysis, and meticulous back-testing. This combination ensures a comprehensive evaluation of an asset's value, market conditions, and historical performance." EyeQ 

• Discover: eyeQ analysis explained | eyeQ: our smart machine in action | Glossary

This new series of weekly articles uses eyeQ’s smart machine to highlight 10 stocks whose share price trades at either a discount or premium to eyeQ’s Model Value price (where macro conditions say the share 'should' trade).

A minus figure in these tables indicates a share trading below eyeQ’s Model Value, implying they are ‘cheap’ versus macro conditions. A plus figure screens as rich because the current share price is above eyeQ’s Model Value.

Most companies will have a model relevance above 65%, which means the macro environment is critical and any valuation signals carry strong weight.

Here are definitions of terms used in the analysis: 

Model value

Where our smart machine calculates that any stock market index, singe stock or exchange-traded fund (ETF) should be priced (the fair value) given the overall macroeconomic environment.

Model relevance

How confident we are in the model value. The higher the number the better! Above 65% means the macro environment is critical, so any valuation signals carry strong weight. Below 65%, we deem that something other than macro is driving the price. 

Fair Value Gap (FVG)

The difference between our model value (fair value) and where the price currently is. A positive Fair Value Gap means the security is above the model value, which we refer to as “rich”. A negative FVG means that it's cheap. The bigger the FVG, the bigger the dislocation and therefore a better entry level for trades.  

Long Term model

This model looks at share prices over the last 12 months, captures the company’s relationship with growth, inflation, currency shifts, central bank policy etc and calculates our key results - model value, model relevance, Fair Value Gap.

UK Top 10

Source: eyeQ. Long Term tactical models. Data correct as at 4 March 2024.

It's Spring Budget week in the UK, so mainstream financial media will engage in guessing games, trying to pick the potential winners and losers from Chancellor Jeremy Hunt on Wednesday.

Typical analysis will focus on the potential for:

• tax cuts and whether they help retailers
• measures to stimulate the property market, which most will see as positive for homebuilders
• so-called sin taxes such as extending windfall taxes on energy companies

To that end, it is interesting to note the two cheapest stocks on eyeQ’s macro models are retailer Ocado and homebuilder Taylor Wimpey.

Our Ocado Group (LSE:OCDO) model shows macro relevance is 64% - it’s just slipped below our 65% threshold for a macro regime. Put another way, the stock is being driven by company news rather than macro fundamentals. That helps explain why recent analyst downgrades have been such a drag on the share price.

But macro conditions have actually been improving and that divergence between rising model value and falling share price has opened a significant discount. The stock is now around 57% cheap relative to the big-picture stuff such as growth and inflation. Indeed, our model shows stronger economic growth/rising inflation are positives for the retailer so, if Wednesday’s budget does see lots of stimulatory giveaways to cheer consumers, Ocado could benefit.

The reason there’s no trade signal is that fall in macro relevance. If we see macro conditions become an important driver of the share price once again, then these valuations make Ocado look like a good bet for anyone thinking that the government will try to juice the economy ahead of an autumn election.

Similarly, most analysis will suggest homebuilders would benefit from any stimulus for the housing market.

Looking at Taylor Wimpey (LSE:TW.), eyeQ agrees in some respects. Notably the stock is cheap to overall macro conditions. So any micro measures - for example, there’s speculation the previous stamp duty cut could be made permanent – could act as a catalyst for the share price to catch up to our 151p model value.

There is a but, however. The biggest driver of Taylor Wimpey on our model is inflation expectations. Rising inflation hurts the share price. So, if financial markets take fright at any “unjustified” stimulation that is deemed to run the risk of stoking inflation, then Taylor Wimpey would suffer.

Why? Probably because it would stoke fears about the Bank of England raising rates and the pain from more expensive mortgages would provide a big offset. Remember the market’s reaction to the Liz Truss mini-budget of 2022!

This is the pain with macro. It’s complicated, with lots of moving parts often pulling in different directions. But that’s why ii engaged eyeQ’s smart machine, which employs an AI framework to help you cut through the noise.

International Top 10

Source: eyeQ. Long Term tactical models. Data correct as at 4 March 2024.