Burberry’s Share Price Rally May Be Overextended, According to eyeQ Analysis
Burberry Group (LSE:BRBY) has seen its share price rally by around 30% in the last month, driven by the news of a US-China tariff rapprochement. However, according to analysis from eyeQ, a macro-valuation and trend analysis tool, the rally may be overextended. eyeQ’s model value for Burberry is 613.20p, which implies a fair value gap of +24.96% premium to the current share price.
In an interview with interactive investor, eyeQ explained that their 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. "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," said eyeQ.
From a macro perspective, Burberry’s rally has taken the stock into rich territory on eyeQ. The company’s macro relevance score is 56%, which is below the threshold for a macro regime. This suggests that macro factors explain just over half of the price action right now, and company fundamentals have been more important recently. Burberry had a poor run over 2023/24, and new management is now trying to revamp the brand. News on that turnaround plan will be critical.
eyeQ’s analysis suggests that the rally has been driven by company-specific news, rather than a significant improvement in macro conditions. "Macro factors explain just over half of price action right now (eyeQ’s macro relevance score is 56%). That’s below our threshold for a macro regime but does suggest macro can’t be completely ignored," said eyeQ.
The fair value gap of +24.96% implies that the stock is trading at a premium to its model value. This suggests that a fair degree of good news is already in the price, and the risk-reward is not particularly attractive from a macro perspective. "Low macro relevance precludes an official bearish signal, but it does suggest a fair degree of good news is already in the price. Again, company news will dictate the market’s reaction to tomorrow’s earnings, but – from the macro perspective – this isn’t a stock with a particularly attractive risk-reward right now," said eyeQ.
Burberry’s earnings release is due tomorrow, and investors will be closely watching the company’s update on its turnaround plan. While the recent rally has been driven by positive news, eyeQ’s analysis suggests that the stock may be overextended. As interactive investor notes, "Burberry Group (LSE:BRBY) goes into tomorrow’s earnings release having rallied around 30% in the last month. Luxury goods were one of the big losers from a potential global trade war, so the news of a US-China tariff rapprochement has helped fuel a strong rally."
In conclusion, while Burberry’s share price has rallied significantly in recent weeks, eyeQ’s analysis suggests that the stock may be trading at a premium to its fair value. Investors should be cautious and carefully consider the company’s earnings release tomorrow before making any investment decisions.
Terminology
- Model value: Where eyeQ 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 eyeQ is 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%, eyeQ deems that something other than macro is driving the price.
- Fair Value Gap (FVG): The difference between eyeQ’s model value (fair value) and where the price currently is. A positive Fair Value Gap means the security is above the model value, which eyeQ refers 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 key results – model value, model relevance, Fair Value Gap.
Source: eyeQ (Quant Insight) via interactive investor. Past performance is not a guide to future performance.
