We posted on Boston Scientific (BSX) in January, April, and October 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.) In the currently re-estimated model (i.e. through December 2011), the former defining CPI component led the share price by 6 month and the latter one by 4 months (slightly increased lags but contemporary CPIs are used in the December model).
Thus, here we update the original model using data through December 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.
The best-fit 2-C models (March, September, and December 2011) 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
BSX(t) = -1.44H(t-6) – 2.21DUR(t-4) + 0.84(t-1990) + 546.90, December 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 almost negligible, i.e. $0.84 per year.
All models predicted the price at a three-to-four month horizon with standard deviation of $2.24 between July 2003 and December 2011 ($1.83 in March). The currently observed growth in the defining consumer price indices should drive the share price down. In the first quarter of 2012, the price may still drop below zero. However, the price will gradually recover above the zero line. The model residual in Figure 3 should return to the zero line somehow.
Figure 1. The evolution of H and DUR.
Figure 2. Observed and predicted BSX share prices. March, September, and December 2011 models. 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.