eyeQ: this is the big picture for UK retailers

"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

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Marks & Spencer

Tactical short-term model

Model value: 244.82p

Macro relevance: 78%

Fair Value Gap (premium/discount to Model Value): 3.69%

Data correct as at 15 February 2024. Please click glossary for explanation of terms.

Waitrose has announced up to £30 million of price cuts across a range of its goods. This is the grocer’s second round of price cuts as UK food inflation starts to ease. Good news for shoppers, but what does this mean for investors?

Well there’s a pattern emerging across a number of consumer companies. Heineken, Kraft Heinz, McDonald’s and Coca-Cola have all reported results recently and while there are variations, some common themes are emerging.

They all say that consumers, especially those on lower wages, are pushing back against higher prices. That the combination of growth fears and cost-of-living pressures are making shoppers more price conscious. As a result, these firms are having to compete on prices again to maintain market share. Note that Waitrose’s sales rose 3.5% in January (versus sales a year ago). The comparable sales growth at Aldi, Sainsbury's and Lidl was 7%, 8% and 12% respectively.

The point is the battle to win shoppers’ loyalty hurts the margins of these companies. Hence, why their share prices have had a rough start to the new year. And that’s true for US, European and UK consumer stocks.

So, what to do?

The first choice an investor has to make is whether to invest in single stocks or an exchange-traded fund (ETF).

The main advantage of an ETF such as Invesco Consumer Staples S&P US Sel Sec ETF (LSE:XLPS) is that it means you don’t have to spend time picking the individual winners and losers.

The eyeQ smart machine shows US Consumer Staples as pretty close to fair value. Probably more important is the fact that overall macro conditions are moving sideways.

In contrast, the big picture for individual UK retailers is less upbeat. The chart below shows Marks & Spencer Group (LSE:MKS)’s share price versus where our AI model says the stock “should” trade given big picture stuff such as economic growth, inflation, the Bank of England, and more.

• the good news: the sell-off has been slightly more aggressive than justified, leaving M&S 3.7% cheap to macro conditions.
• the bad news: model value is clearly trending lower, i.e. macro conditions are deteriorating.

The short version? Some value may be starting to build, but there’s no clear signal right now. This is one to watch and wait.

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.

Short-term model

The short-term model looks at share prices over the last four 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.