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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"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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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.
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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