Novellus Systems share predicted

An investor is usually interested to know the future evolution of stock prices. The current stock pricing paradigm does not allow to see far enough and not much helpful for a small/middle size investors. (Very big investors can always play nasty games in their favour.) Therefore, only deterministic pricing model can equalize chances. We propose such a concept which  is very simple and is based on deterministic links between share prices and prices of goods and services included in the consumer price index, CPI.

Literally, we decompose a share price (monthly closing price adjusted for splits and dividends) into a weighted sum of two individual CPI components, linear time trend component and constant free term. We allow positive and negative time lags between all variables in the relationship and seek to minimize the RMS model error by varying the involved coefficients. The set of CPI components consists of 92 independent price indices of different level: from major (overall and core CPI) to very small (e.g. photo and related materials). When the modeled share lags behind both defining CPI components we have a deterministic model predicting at a horizon of the smallest time lag. This concept gives excellent results in terms of the model error and very stable pricing models which are valid during several years. In 2008, the model successfully predicted bankruptcy of some major banks, including Lehman Brothers. Fannie May and Freddie Mac. We were able to forecast negative share prices several months ahead [1].  One can also find in [1] a formal model description. 

In this blog, we present and track successful models from the S&P 500 list. They are numerous. For other companies from the S&P 500 list, we also have accurate quantitative models, but they are not deterministic since at least one of defining CPI components lags behind the modeled price. We revisit (recalculate) all models every quarter using new data and report on successful models. In some cases, a model should hold for a year before we publish it.

In this post, we present a share pricing model for Novellus Systems (NVLS). It belongs to Technology sector and is specialized in semiconductor equipment and material.  A preliminary model was obtained in September 2009 (18 months ago) and covered the period from January 2009 (25 months!). This old model included the same indices as the current one: the price index of food less beverages (FB) and the index of motor vehicle parts (MVP).  Both indices seem to be not related to the major product of this company, but define a very reliable stock price model.

The most recent model uses the monthly closing price as of April 2011 and the CPI estimates published on April 14, 2011. Both indices lead by 4 months the NVLS share price.  Figure 1 depicts the evolution of the indices which provide the best fit model, i.e. the lowermost RMS residual error, between January 2009 and March 2011.  The model is as follows:

NVLS (t) = -2.62FB(t-4) + 2.34MVP(t-4) + 4.21(t-1990) + 196.8

where NVLS(t) is a share price in US dollars, t is calendar time.

It is interesting that food related indices have negative coefficients in our models. This means that increasing food price suppresses the growth in all shares on the market. This effect has perfect sense because the food demand is likely not very flexible and is considered as a major threat to the growth of real U.S. economy and stock market.

The observed and predicted models are depicted in Figure 2. The residual error is of $2.52 for the period between July 2003 and March 2011. From Figure 2, one can expect the share will drop to the level of $30 by the end of 2011 Q2, and then even lower.

Figure 1. Evolution of the price indices MVP and FB.

Figure 2. Observed and predicted NVLS share prices.
1. Kitov, I. (2010). Modelling share prices of banks and bankrupts, Theoretical and Practical Research in Economic Fields, ASERS, vol. I(1(1)_Summer) pp. 59-85

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