eyeQ: assessing Next and the UK retail sector
Experts at eyeQ have used AI and their own smart machine to analyse macro conditions and generate actionable trading signals. Here, it picks over the country’s biggest retail chains.
7th January 2025 11:34
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
Next
Macro Relevance: 42%
Model Value: 9,955.13p
Fair Value Gap: -0.72%
Data correct as at 7 January 2025. Please click glossary for explanation of terms. Long-term strategic model.
Next (LSE:NXT) provided a trading update today. On Thursday, Greggs (LSE:GRG), Tesco (LSE:TSCO) and Marks & Spencer Group (LSE:MKS) issue updates. On Friday, it’s Sainsbury (J) (LSE:SBRY)’s turn. By the end of the week we’re going to have a lot of anecdotal evidence about UK shopping habits, which economists will extrapolate to get a sense of how healthy (or not) UK consumers are feeling.
If Next is anything to go by the news will be mixed. Profits over the Christmas season were up, but forward guidance for 2025 is more cautious. And that’s primarily because of the Budget and the increases in employers’ tax bills which will 1) force grocers to raise prices, and 2) require firms to find additional cost savings.
These trading updates are a good example of where bottom-up stories from individual companies can help frame the big picture macro view of the broader UK economy. Marrying macro and micro together is a useful skill for investors.
eyeQ can help in that regard. Looking at these retail stocks on our models, a few things stand out:
- Model confidence is typically low. Macro explains 42% of price action in Next, 27% in Tesco, 33% for Marks & Spencer, 39% for Sainsbury’s. Only Greggs (68%) is a macro play right now
- Our Valuation Gaps come with a health warning given those low macro relevance scores, but most stocks sit in-line or modestly cheap to overall macro conditions. The exception is Sainsbury’s, which sits 4.75% rich on our models
- Model value in every case isn’t doing anything; rather just tracking sideways waiting for a new directional trend.
The chart below shows Next, which is fairly typical of the macro profile of the sectors. Macro relevance needs to rise above 65% for the stock to be deemed a macro trade. Model value rose for much of 2024, but that uptrend stalled at the end of the year. We’re awaiting new news to give us a fresh push one way or other.
The hope was that the Budget would have provided a positive catalyst for growth, but sadly the mood music since Chancellor Rachel Reeves’ fiscal statement has been more downbeat.
But whichever way this range breaks, eyeQ model value will give a real-time clue on whether macro conditions are improving or deteriorating, and which stocks are leading or lagging that move.
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.
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