Is Diageo Stock Fairly Valued At $190?

by Trefis Team
-3.78%
Downside
198
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190
Trefis
DEO
Diageo
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After rising 21% in the last six months and more than 5% in the last one week, Diageo stock (NYSE: DEO), which now trades at $190, seems to have reached its near term potential. The successful rollout of the vaccination program and stimulus measures have led to expectations of faster economic recovery and a rise in consumer spending. This will benefit a beverage giant like Diageo to improve its sales and margins. The reopening of restaurants and retail chains with lockdowns being lifted gradually, along with the company’s focus on premiumization, is likely to provide a boost to its top and bottom line in the coming quarters. Though the recent spike in Covid positive cases was a sign of worry, the absence of strict lockdowns (like the ones seen in 2020) will not see any major hit to the company’s business. These factors led to the recent surge in DEO’s stock price to $190.

But will Diageo’s stock continue its upward trajectory over the coming weeks, or is a correction in the stock more likely? According to the Trefis Machine Learning Engine, which identifies trends in a company’s stock price data for the last ten years, returns for DEO stock average close to 2% in the next three-month (63 trading days) period after experiencing a 21% rise over the previous six-month (126 trading days) period. What also comes out of the analysis is that patient investors will benefit, as the stock provides healthy double-digit returns to ones who wait it out for a year.

But how would these numbers change if you are interested in holding DEO stock for a shorter or a longer time period? You can test the answer and many other combinations on the Trefis Machine Learning to test DEO stock chances of a rise after a fall and vice versa. You can test the chance of recovery over different time intervals of a quarter, month, or even just one day!

MACHINE LEARNING ENGINE – try it yourself:

IF DEO stock moved by -5% over five trading days, THEN over the next 21 trading days, DEO stock moves an average of 3 percent, which implies a return which is 0.7% more than that of the S&P500.

More importantly, there is 74% probability of a positive return over the next 21 trading days and 54% probability of a positive excess return after a -5% change over five trading days.

Some Fun Scenarios, FAQs & Making Sense of DEO Stock Movements:

Question 1: Is the average return for Diageo stock higher after a drop?

Answer:

Consider two situations,

Case 1: Diageo stock drops by -5% or more in a week

Case 2: Diageo stock rises by 5% or more in a week

Is the average return for Diageo stock higher over the subsequent month after Case 1 or Case 2?

DEO stock fares better after Case 1, with an average return of 3.1% over the next month (21 trading days) under Case 1 (where the stock has just suffered a 5% loss over the previous week), versus, an average return of 1.6% for Case 2.

In comparison, the S&P 500 has an average return of 3.1% over the next 21 trading days under Case 1, and an average return of just 0.5% for Case 2 as detailed in our dashboard that details the average return for the S&P 500 after a fall or rise.

Try the Trefis machine learning engine above to see for yourself how Diageo stock is likely to behave after any specific gain or loss over a period.

Question 2: Does patience pay?

Answer:

If you buy and hold Diageo stock, the expectation is over time the near term fluctuations will cancel out, and the long-term positive trend will favor you – at least if the company is otherwise strong.

Overall, according to data and Trefis machine learning engine’s calculations, patience absolutely pays for most stocks!

For DEO stock, the returns over the next N days after a -5% change over the last five trading days is detailed in the table below, along with the returns for the S&P500:

Question 3: What about the average return after a rise if you wait for a while?

Answer:

The average return after a rise is generally lower than after a fall as detailed in the previous question. Interestingly, though, if a stock has gained over the last few days, you would do better to avoid short-term bets for most stocks.

DEO’s returns over the next N days after a 5% change over the last five trading days is detailed in the table below, along with the returns for the S&P500:

It’s pretty powerful to test the trend for yourself for Diageo stock by changing the inputs in the charts above.

E-commerce is eating into retail sales, but this might be an investment opportunity. See our theme on E-commerce Stocks for a diverse list of companies that stand to benefit from the big shift.

 

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams

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