eyeQ: is slump at easyJet and IAG a buying opportunity?
Experts at eyeQ have used AI and their own smart machine to analyse macro conditions and generate actionable trading signals. This is what it says about downbeat airline stocks.
23rd July 2024 08:46
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
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easyJet
Trading signal: long-term strategic model
Model value: 479.30p
Fair Value Gap: -12.43% discount to model value
Model relevance: 86%
Data correct as at 23 July 2024. Please click glossary for explanation of terms.
End of an era?
Yesterday, Ryanair shares fell hard after the company announced a profit warning. The airline said fares would be “materially lower” as consumers have become more cautious with their travel plans. Does this signal the end of the post-Covid lockdown period of “revenge travel” when consumers were happy to splash the cash on experiences rather than goods?
The markets appear to fear that. Both British Airways owner International Consolidated Airlines Group SA (LSE:IAG) and easyJet (LSE:EZJ) share prices fell hard too.
But this is exactly where eyeQ’s smart machine can help. If economic growth is slowing and is a big drag on the share price, our algorithm captures this relationship.
Moreover, it can measure where the stock ‘should’ trade given the macro picture including things like how strong or weak the economy is, or how inflation is impacting the cost-of-living crisis.
In the case of easyJet, macro really matters. The bottom chart shows how high and stable our macro relevance score is. And the top chart shows how between mid-May and the end of June, economic growth was a big drag, pulling our model value 22% lower. But look at July. Model value has bounced 5%.
This latest sell-off has ignored the fledgling signs of a recovery, and that leaves easyJet 12.43% cheap to overall macro conditions. It’s very close but it’s not quite enough yet to trigger a bullish signal.
Source: eyeQ. Past performance is not a guide to future performance.
IAG
Trading signal: long-term strategic model
Model value: 174.28p
Fair Value Gap: -6.14% discount to model value
Model relevance: 53%
Data correct as at 23 July 2024. Please click glossary for explanation of terms.
It’s a similar story with IAG, but the health warning here is 53% macro relevance, meaning the British Airways’ stock price is moving more on company news than big picture stuff such as growth and inflation.
So, in short, company news is important. Lower airfares imply lower profits and that cannot be ignored. And if you believe a recession is coming, this bounce in the economic data in July is just a “blip” which won’t last.
But we’ll be watching the orange line in these charts very closely in the weeks ahead. If macro fundamentals do hold up, then some value is starting to build here and our smart machine may flag a decent buying opportunity.
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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