eyeQ: still value in this defence giant
Experts at eyeQ have used AI and their own smart machine to analyse macro conditions and generate actionable trading signals. A FTSE 100 stock has just attracted its attention.
13th February 2025 13:51
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
BAE Systems
Macro Relevance: 52%
Model Value:1,304.15p
Fair Value Gap:-4.96% discount to model value
Data correct as at 13 February 2025. Please click glossary for explanation of terms. Long-term strategic model.
The news that Trump has started Ukraine peace talks with Putin has prompted a rally in European equities and the Euro currency, as markets hope the end of the war could bring economic benefits.
The conventional wisdom is that a “peace dividend” boosts an economy because the government reduces defence expenditure and instead redirects spending to domestic priorities like housing, education and healthcare. In economic jargon, people reference a trade-off between “guns and butter”: in war time, more resources are allocated to guns than butter, peace means the opposite.
This time should be different, however.
Why? Because whatever peace deal emerges there is one certainty – Europe is going to have to pay more for its own security. The stated aim is for European countries to boost defence spending to 3.5% of GDP. That’s a huge increase from present levels and will take years. But the direction of travel is clear.
That’s why European defence stocks have rallied ever since Russia invaded Ukraine three years ago. It also explains why a stock like BAE Systems (LSE:BA.) has a low macro relevance score. This theme (increased defence spending) has been more important than macro stories like inflation and what the Bank of England does on Base Rates.
But macro still explains 52% of price action in BAE and our model says the stock should be trading at 1,304p.
Even with this most recent rally, the stock sits nearly 5% below that. Low macro relevance precludes an official bullish signal but, if that relevance number was over 65%, this Fair Value Gap would be big enough to trigger one.
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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