I have been keeping an eye on Easy Jet (EZJ.L) for a few months ever since its spectacular fall at the start of 2016; over the year there has been significant under performance relative not only to the FTSE-100 but also its sector.
Having thought about a purchase in August and not acting the initial rally back towards £12 per share left me feeling that I may have missed out, but a reversal back to the lows has made me think again. Whilst I will undertake a more extensive review the chart below is a good indicator and shows the following: –
Top Chart – Share price and EPS
Bottom Chart – Cyclically Adjusted PE Ratio with Standard Deviation Lines at plus and minus 1, 1.5 and 2 from the 4 year average
With the CAPE now well below the four year average of around 33x and dipping over two standard deviations from this a reversion to mean could result in a sizeable rise in price.
- 4 Year CAPE Average is 30x
- Cyclically Adjusted EPS is 0.6011
- CAPE = Price / Cyclically Adjusted EPS so
- Price = CAPE x Cyclically Adjusted EPS
- A reversion to the average would imply a price of 30 x 0.6011 = £18.03
- Gain from current price would be circa 74%
Nothing is guaranteed but never underestimate mean reversion! With a bit more research I may well be adding this to the model portfolio.