Hewlett Packard (HPQ) provides a good example of a successful share price prediction at a several month horizon. We have already published our predictions at a four month horizon four times (July 2010, January 2011, March 2011, and July 2011). All predictions were based on our concept of share pricing as decomposition into a weighted sum of two CPI components. We calculated the evolution of the monthly closing price (adjusted for dividends and splits). Here we test and update the model using data through September 2011.
Originally, the long term model for HPQ share price was defined by the index of food without beverages (FB) and that of rent of primary residency (RPR). The former CPI component led the share price by 4 months and the latter one led by 5 months. Figure 1 depicts the overall evolution of both involved indices through August 2011. Below we present three best-fit 2-C models for HPQ(t) obtained at different times:
HPQ(t) = -3.20FB(t-4) + 2.91RPR(t-5) + 3.64(t-1990) - 50.82, July 2010
HPQ(t) = -3.34FB(t-4) + 3.41RPR(t-5) + 0.51(t-1990) - 85.44, June 2011
HPQ(t) = -3.46FB(t-4) + 3.68RPR(t-5) – 0.72(t-1990) - 99.88, September 2011
where HPQ(t) is the price in US dollars, t is calendar time. All coefficients have been slightly drifting. This process expresses the trade-off between the linear trend in the difference between the defining CPIs and the time trend term in the above equtions.
The predicted curves are shown in Figure 2 (March and September 2011). In the second quarter of 2011, the model predicted the share price to fall to the level of $37 in June 2011 and then to $33 by the end of July 2011.
From Figure 2, we predict the price to stabilize around $20 because the current price level is below the predicted one. Therefore, one can expect the price not to drop below $20 per share.
Figure 1. Evolution of the price of FB and RPR.
Figure 2. Observed and predicted HPQ share prices in March (upper panel) and September (lower panel) 2011. The contemporaneous prediction is shown by red line. In March, we expect the price to fall down to $33 in July 2011. In September, we predict the price to stabilize around $20.