4/1/14

Predicting stock prices: Textron may grow to $45 in May


Here we model the evolution of Textron Inc. (NYSE: TXT) stock price. TXT is a company from industrial goods sector which “operates in the aircraft, defense, industrial, and finance businesses worldwide”.  The model has been obtained using our concept of stock pricing as a decomposition of a share price into a weighted sum of two consumer price indices (CPIs). The background idea is a simplistic one: there is a potential trade-off between a given share price and goods and services the company produces and/or provides. For example, the energy consumer price does influence the price of energy companies. It should be taken into account that one defining consumer price (or relevant CPI) has to be related to the share and the other CPI should be an independent one as representing a dynamic reference, i.e. the changing price environment. Both defining CPIs may lead the price of lag behind by a few months.
 
We have borrowed the time series of monthly closing prices of TXT from Yahoo.com and the relevant (seasonally not adjusted) CPI estimates through February 2014 are published by the BLS.  We have found that the evolution of TXT share price is defined by the consumer price index of transportation services (TS) and the index of pets, pet products and services (PETS) from recreation CPI category. We assume that the index of transport services is the price driver, i.e. the consumer prices of transportation services.   It is instructive that Textron Inc. operates Cessna, Bell, and Textron Systems, i.e. TXT is directly related to transportation systems. The defining time lags are as follows: the TS index leads the share price by 5 months and the PETS index has a 3 months lead. The relevant best-fit model for TXT(t) is as follows:
TXT(t) =  -2.78PETS(t-3) – 2.86TS(t-5)  + 33.02(t-2000) + 832.91,  February 2014 

where TXT(t) is the TXT share price in U.S. dollars,  t is calendar time. Figure 1 displays the evolution of both defining indices since 2002.  Figure 2 depicts the high and low monthly prices for TXT share together with the predicted and measured monthly closing prices (adjusted for dividends and splits). It is worth noting that the predicted curve actually leads the observed one by 3 months, i.e. the model sees three months ahead.

The model is stable over time. Table 1 lists the best fit models, i.e. coefficients, b1 and b2, defining CPIs, time lags, the slope of time trend, c, and the free term, d, for select models for the period between November 2009 and February 2014. These models all have the same defining CPIs, similar coefficients and time lags – they are practically identical. Therefore, the estimated TXT model is highly reliable over time and predicts at a three month horizon. The model residual error is shown in Figure 3. The standard deviation between July 2003 and February 2014 is $4.20. 

The model predicts TXT price to rise to $45 in May 2014.  

Table 1. Selected best fit models for the period between November 2009 and February 2014

Month
b1
CPI1
lag1
b2
CPI2
lag2
c
d
Feb-14
-2.780
PETS
3
-2.860
TS
5
33.018
832.907
Jan
-2.795
PETS
3
-2.861
TS
5
33.122
834.553
Dec-13
-2.822
PETS
3
-2.859
TS
5
33.272
836.397
Nov
-2.807
PETS
3
-2.854
TS
5
33.156
834.278
Oct
-2.814
PETS
3
-2.849
TS
5
33.169
833.976
Sep
-2.836
PETS
3
-2.839
TS
5
33.243
834.010
Aug
-2.865
PETS
3
-2.826
TS
5
33.341
833.989
Jul
-2.877
PETS
3
-2.813
TS
5
33.333
832.626
Mar-12
-3.168
PETS
3
-2.929
TS
7
35.877
880.991
Feb
-3.125
PETS
3
-2.750
TS
7
34.582
842.784
Jan
-3.216
PETS
3
-2.890
TS
7
35.957
877.784
Dec-11
-3.240
PETS
3
-2.884
TS
7
36.091
878.639
Nov
-3.256
PETS
3
-2.877
TS
7
36.159
878.507
Oct
-3.274
PETS
3
-2.873
TS
7
36.268
879.271
Sep
-3.282
PETS
3
-2.869
TS
7
36.297
879.203
Aug
-3.282
PETS
3
-2.869
TS
7
36.297
879.214
Sep-10
-3.165
PETS
3
-3.089
TS
6
36.755
543.958
Aug
-3.247
PETS
3
-2.970
TS
6
36.663
525.980
Jul
-3.287
PETS
3
-2.909
TS
6
36.603
515.177
Jun
-3.307
PETS
3
-2.865
TS
6
36.506
506.284
May
-3.273
PETS
3
-2.927
TS
6
36.621
511.072
Apr
-3.231
PETS
3
-3.017
TS
6
36.818
519.723
Mar
-3.254
PETS
3
-2.972
TS
6
36.728
510.921
Feb
-3.280
PETS
3
-2.918
TS
6
36.634
500.730
Jan
-3.299
PETS
3
-2.878
TS
6
36.560
492.144
Dec-09
-3.299
PETS
3
-2.845
TS
6
36.421
484.038
Nov
-3.299
PETS
3
-2.841
TS
6
36.391
480.557

 
Figure 1. The evolution of PETS and TS indices

 

Figure 2. Observed and predicted TXT share prices.

 

Figure 3. The model residual error: stdev=$4.20.

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