CVS Caremark Corporation (CVS) is an old member of our list for stock price modeling. We have been following the CVS share since 2009, i.e. since we started developing our concept of share pricing as related to consumer price indices. The original CVS model has been very stable over the past two years and it provides an overall validation for the deterministic share price setting. A very exciting feature of the CVS price model we developed two years ago is the possibility of prediction at a 3 months horizon.
Using new CPI estimates published by the BLS on April 14 we have updated the model and found that the CVS model has not been changing much and is still defined by the consumer price index of other food at home (OFH) and that transportation services (TS). A slight difference consists in smaller time lags: the OFH index leads the share price by 3 months and the TS - by 4 months.
Figure 1 depicts the overall evolution of both involved indices. These two defining components provide the best fit model between August 2009 and March 2011. Relevant coefficients are both negative. Therefore any growth in both indices causes the share price to fall with a several month delay. The slope of time trend is positive and provides an increment of $12 per year. The intercept of $199 is necessary to compensate the difference in the initial values of both indices.
The best-fit 2-C model for CVS(t) is as follows:
CVS(t) = -0.48OFH(t-3) – 1.26TS(t-4) + 12.11(t-1990) + 199.16
where t is calendar time.
The predicted curve in Figure 2 leads the observed price by 3 months with the residual error of $1.82 (was $1.88 in January 2011) for the period between June 2003 and March 2011. The model provides and an excellent and very stable prediction of the share price in the past.
In January we forecasted a period of no growth in the first quarter of 2011. This prediction was successful and thus validated the model. It is necessary to stress again that the model has been predicting the CVS share price since August 2009 with the same accuracy.
During the second quarter of 2001, the share price has to decrease by $2 according to an ace;eratedgrowth in the indices of other food at home and transportation services in Figure 1.
Figure 1. Evolution of the price of OFH and TS.
Figure 2. Observed and predicted CVS share prices. Black diamonds present the contemporary prediction shifted 3 months ahead to fit actual data.