Is Boston Scientific on the brink?

We posted on Boston Scientific (BSX) in January and April 2011 and presented a share price model for Boston Scientific as based on our stock pricing concept.  Both models were similar and included the consumer price index of housing (H) and the index of durable goods (DUR). (Figure 1 depicts the overall evolution of the involved indices.) The former defining CPI component led the share price by 5 month and the latter one by 3 months.  Here we update the original model using data through September 2011. The updated model has the same defining components and time lags with slightly different coefficients. Therefore, the original model provided a reliable prediction through the past year and further in the past. Currently, the best fit model predicts the share to fall below zero in the near future what is equivalent to bankruptcy. A similar prediction (negative share price) was obtained for Lehman Brothers and other financial institutions before they failed.  As an alternative, our model may fail with the change in the overall CPI trends.

                                                                                                                                                

The best-fit 2-C models (March and September) for BSX(t) are as follows:

BSX(t) = -1.41H(t-5) – 2.85DUR(t-3) – 0.09(t-1990) + 630.92, March 2011

BSX(t) = -1.46H(t-5) – 2.71DUR(t-3)  + 0.36(t-1990) + 615.69, September 2011   

where BSX(t) is the (monthly closing adjusted for splits and dividends) share price in US dollars,  t is calendar time.  Both coefficients are negative, and thus the increasing consumer prices result in decreasing share price. The slope of time trend is negligible.

Both models predicted the price at a three month horizon with standard deviation of $1.94 between July 2003 and September 2011 ($1.83 in March). The currently observed growth in the defining consumer price indices should drive the share price down. In the fourth quarter of 2011, the price may drop below zero.    

   

Figure 1. The evolution of H and DUR.  

Figure 2. Observed and predicted BSX share prices. Upper panel: March model with red curve representing the contemporaneous prediction. Lower panel: the updated prediction. The price is negative by the end of 2011.

Figure 3. The model residual, i.e. the difference between the observed and predicted BSX share prices.