eyeQ: Bellway and UK housebuilders – mergers meet macro
interactive investor has teamed up with experts at eyeQ who use artificial intelligence and their own smart machine to generate actionable trading signals. This time they look at Bellway following a 40% rally in three months.
9th February 2024 09:58
by Huw Roberts from eyeQ
"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
Bellway
Trading signal: long-term strategic
Model value: 2,640.43p
Fair Value Gap (premium/discount to Model Value): 6.1%
Model relevance: 67%
Data correct as at 9 February 2024. Please click glossary for explanation of terms.
Bellway (LSE:BWY) reported results this morning. Earnings are always important, and analysts will pore over the details.
But, after this week’s news that Barratt Developments (LSE:BDEV) is buying Redrow (LSE:RDW), the UK housebuilders sector is more excited about the next possible merger target. And some analysts think Bellway is a likely candidate.
That explains the 2.5% spike in the stock price mid-week before today’s earnings news.
But note the big picture stuff like economic growth, inflation, the Bank of England etc has started to reassert itself. eyeQ macro relevance is 67% (above 65% means macro events have a significant influence on share price performance), so the stock is back in a macro regime (a narrative that markets assign to price action) for the first time since October.
Yes, results are important. A possible takeover bid even more so. But investors need to monitor macro conditions too.
Macro conditions are flatlining, so this week’s rally has taken Bellway rich to our model value (current share price is above our model value). Right now, the Fair Value Gap is 6.1% (difference between our model value and the current share price). That’s a reasonable discrepancy but history shows this valuation gap can get further extended before investors want to think about opposing the move.
This is one we will monitor closely in the days and weeks ahead and be sure to flag in these articles when an opportunity presents itself.
Useful terminology:
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 (macro) 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
The Long Term 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.
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Disclosure
We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.
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