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Bottom Up meets Top Down
- US Retailers
Last week Walmart & Target spooked the equity market. This week a number of additional US retailers report earnings & the fear is they provide further evidence that soaring inflation is hurting margins.
The chart below captures macro model confidence & Qi’s Fair Value Gap for some of this week's reporting companies. It enables stock pickers to firstly identify where bottom up analysis of company fundamentals is key; & which stocks are actually more of a macro play.

And then, when a stock is a macro trade, is the stock rich or cheap versus the macro environment?
This Weeks Reporters
In most cases, idiosyncratic risks dominate macro. Amongst this week’s reporters Best Buy, Nordstrom, Dollar General, Gap, Dollar Tree, Ralph Lauren and Urban Outfitters all show model confidence below our 65% threshold. It’s business as usual for stock pickers.

But equity managers need to know that Macy's & Dick’s Sporting Goods are the two reporting retailers with a strong macro story.

In fact, DKS model confidence is not only strong (82%) but rising. The macro regime echoes that of the broader S&P500 – a desire for reflation & easy financial conditions.

It is currently 1.5 sigma or 25% cheap to model value. That is the bottom of the 1y Fair Value Gap range. Indeed, it has only been this cheap to model & in regime 6x since 2009. Back-testing this FVG produces a 67% hit rate & +10.7% average return.

Back-testing Macy’s current FVG & the equivalent stats are 57% & +5.5%.
  • Qi as a productivity tool - free up time to focus stock picking skills on the names being driven by company fundamentals
  • Qi as a risk manager - identify where macro dominates & what your key exposures are
  • Qi as a trade idea generator - Macy's & Dick's Sporting Goods are showing significant dislocations versus macro fundamentals. Both show model value deteriorating but they have already priced in a fair degree of bad macro news already. New longs should ideally wait for model value to turn higher but, for those looking for a possible relief rally, these are potential efficient trade expressions to monitor.
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