“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
Persimmon
Trading signal: long-term strategic model
Model value: 1,187.20p
Fair Value Gap: +6.45% premium to model value
Model relevance: 92%
Data correct as at 11 April 2024. Please click glossary for explanation of terms.
More green shoots for the UK housing market! This morning’s Royal Institute of Chartered Surveyors (RICS) report was the most upbeat in 13 months. Property surveyors are talking about the housing market having now stabilised and are seeing signs that activity can pick up over the second half of 2024.
So far, so good. This is “real-life” evidence from the ground level – surveyors reporting on the conditions they are experiencing first hand. The survey has a strong track record of capturing the pulse of the UK property market.
A word of caution, however. From a macro perspective the key point is something the survey itself emphasises. It is the idea the Bank of England will be cutting rates that is a critical part of that more optimistic outlook.
On eyeQ, Persimmon (LSE:PSN) is the homebuilder with the highest macro relevance score (92%), meaning the stock is heavily influenced by big-picture dynamics.
And our model value (where the stock “should” trade given UK growth rates, the inflation outlook and more) has fallen 5.2% in the last month, thanks primarily to annoyingly resilient inflation expectations and high commodity prices. That combination is exactly the kind of thing that may prevent the Bank of England from cutting rates as much as the market hopes.
Persimmon is slightly rich (current share price above our model value) to our model (6.4%) as, thus far, it has ignored the deterioration in the macro picture. That’s not a big enough Fair Value Gap to trigger a definitive bearish signal. It is, however, enough to take the good news around RICS this morning with a pinch of salt.
Useful terminology:
Model value
Where our smart machine calculates that any stock market index, singe 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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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.
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