eyeQ: UK homebuilders undervalued in Budget aftermath

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Taylor Wimpey

Macro Relevance: 72%
Model Value: 155.88p
Fair Value Gap: -5.99% discount to model value

Data correct as at 5 November 2024. Please click glossary for explanation of terms. Long-term strategic model.

The UK Budget unsettled markets last week, both equities and bonds. The 10-year gilt yield rose sharply in the aftermath, spooked by the loosening of fiscal rules to allow for a jump in borrowing. Not only are taxation and public spending levels reaching record peacetime levels, but borrowing is also forecast to rise.

In the stock market, the news reverberated most in those sectors deemed most rate sensitive, highly leveraged and domestic focused. At the index level, this was felt most in mid-caps. The more domestic FTSE 250 would be more sensitive to the risks on UK growth from the rise in employer National Insurance contributions.

At the sector level, the brunt of the losses was seen in UK homebuilders, with the Budget deemed to be delaying a decline in the UK rate path. The generous interpretation of the Budget would be that growth will follow and that the private sector will be incentivised to drive much-needed growth. Arguably, if gilt markets can stabilise from here, last week has presented an opportunity to identify undervalued homebuilders. While the correlation with gilt yields remains high, with de-regulation of planning approvals ahead of us, this sector will benefit from lower operational costs and speed to market.

Taylor Wimpey (LSE:TW.) fell almost 7% last Thursday before steadying on Friday. The stock has fallen back to its 200-day moving average i.e. its long-term trend. eyeQ’s smart machine shows the stock trading 6% below its model value – its largest discount since the spring (that was an opportune moment to buy), and among the largest discounts in the UK sector. See the chart below. The stock has remained well explained by eyeQ’s model with explanatory power high.

eyeQ shows the stock wants UK inflation expectations to continue to fall. Taylor Wimpey would benefit from rising real incomes and easing mortgage rates to boost buyer sentiment. This week, attention will shift to the US elections. There is a risk we see heightened volatility in US bond markets. However, any further weakness likely presents a good entry opportunity for the stock.

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.