Interactive Investor

eyeQ: meme-stock squeeze – the UK version

interactive investor has teamed up with the experts at eyeQ who use artificial intelligence and their own smart machine to analyse macro conditions and generate actionable trading signals. This time it looks at a volatile stock.

15th May 2024 10:13

by Huw Roberts from eyeQ

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"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

​​​​​Ocado

Trading signal: long-term strategic model
Model value: 368.10p
Fair Value Gap: -1.01% discount to model value
Model relevance: 40% 

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

The numbers are paltry compared to GameStop Corp Class A (NYSE:GME) or AMC Entertainment Holdings Inc Class A (NYSE:AMC), but the resurgence of the meme-stock squeeze in the US has filtered across to Europe. And in the UK, it’s Ocado Group (LSE:OCDO) that has emerged as a potential beneficiary.

Why?

Remember that the starting point for any meme rally is a big short base. In 2021, data suggested 140%* of GameStop’s shares were sold short. Today that short is more like 24%. That’s one reason why some commentators feel this time it is different, and that the squeeze won’t be as effective.

But it helps explain why some of Europe’s most-shorted stocks have enjoyed a strong start to the week. Volvo AB Class B (OMX:VOLV B) has 20%** of its shares out on loan and the stock has rallied around 5% this week. In the UK, Ocado is the standout with 12% of its shares out on loan. It rallied hard on Tuesday, but is giving back some of its gains this morning.

The meme-stock frenzy essentially means a group of (predominantly retail) investors identify companies with large short bets against them; then they try to squeeze the price higher, thereby causing those bear bets to capitulate and buy back their shorts to fuel aggressive gains.

In this environment, positioning is the critical factor, even more so than macro conditions or company fundamentals. And it is interesting to note eyeQ’s macro relevance score for Ocado (how confident we are in our model value).

The software company/online grocer spent large periods of the last year in a macro regime. Big picture stories such as economic growth, inflation, and the Bank of England’s policy stance were key for the share price.

But from mid-March to mid-April, macro relevance fell from 70%-plus to just 3%. eyeQ was saying Ocado was ripe for non-macro stories to become important.

eyeQ Ocado performance graph

Source: eyeQ. Past performance is not a guide to future performance.

Now macro is making a comeback, with macro relevance bouncing sharply. But we need to see that number over 65% for us to have an official macro “regime”.

While there’s a health warning with our model right now, it is worth being aware that macro conditions say the stock should be trading around 368p. Sub 65% macro relevance plus a very small Fair Value Gap means there’s no signal right now, and no reason from macro fundamentals to chase the upside.  

*short positioning data from S3 Partners
**shares out on loan (a common proxy for short positioning) data from S&P Global Market Intelligence

Useful terminology:

Model value

Where our smart machine calculates that any stock market index, single 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

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.

These third-party research articles are provided by eyeQ (Quant Insight). interactive investor does not make any representation as to the completeness, accuracy or timeliness of the information provided, nor do we accept any liability for any losses, costs, liabilities or expenses that may arise directly or indirectly from your use of, or reliance on, the information (except where we have acted negligently, fraudulently or in wilful default in relation to the production or distribution of the information).

The value of your investments may go down as well as up. You may not get back all the money that you invest.

Equity research is provided for information purposes only. Neither eyeQ (Quant Insight) nor interactive investor have considered your personal circumstances, and the information provided should not be considered a personal recommendation. If you are in any doubt as to the action you should take, please consult an authorised financial adviser. 

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.

Please note that our article on this investment should not be considered to be a regular publication.

Details of all recommendations issued by ii during the previous 12-month period can be found here.

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