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eyeQ: is Terry Smith right about Diageo shares?

Experts at eyeQ use AI and their own smart machine to analyse macro conditions and generate actionable trading signals. Here, it examines the blue-chip drinks company that’s on everyone’s lips.

2nd October 2024 11:33

by Huw Roberts from eyeQ

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eyeQ Diageo Guinness

"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

Diageo

Macro Relevance: 21%
Model Value: 2,415.20p
Fair Value Gap: +6.91%

Data correct as at 2 October 2024. Please click glossary for explanation of terms. Long-term strategic model.

ii have flagged how two star stock pickers have very different views on drinks giant Diageo (LSE:DGE). Terry Smith and Nick Train both look at the stock from the perspective of company fundamentals.

eyeQ looks at the stock exclusively from a macro perspective and the first observation we would make is, on this occasion, company fundamentals matter more. The bottom chart below shows the macro relevance score has been below our critical 65% threshold for around three and a half years now.

That means choosing which stock picker you believe is more important than understanding how big-picture stuff such as Bank of England rate cuts impact the share price.

That said, the top chart looks OK to our eyes. Macro news tend to evolve more slowly than company news. Yes, you get growth shocks or surprise central bank decisions, but overall earnings beats or profit warnings tend to be noisier. So, we always like it when eyeQ model value is stable and you see the spot price of a stock gyrating around it. And that’s what you see here, the Diageo share price in black overshoots and undershoots around the macro trend.

And we have an overshoot right now. Diageo currently sits 6.9% above where macro conditions say it should trade. Macro relevance of 21% means there is no official bearish signal. But the machine is saying this latest bounce has moved too far relative to the prevailing macro environment.

Put another way, from a tactical macro perspective eyeQ aligns with the Terry Smith argument.

eyeQ Diageo chart

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

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.

ii adheres to a strict code of conduct.  Contributors may hold shares or have other interests in companies included in these portfolios, which could create a conflict of interests. Contributors intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. ii will at all times consider whether such interest impairs the objectivity of the recommendation.

In addition, individuals involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.

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