A month ago we presented a quarterly report of the performance of our share price model for Hewlett Packard (NYSE:HPQ). This company 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, July 2011, and September 2011). All predictions were based on our concept of share pricing as decomposition into a weighted sum of two CPI components. The intuition behind our concept is simple; a faster growth in the CPI related to the share price (e.g. energy consumer price for energy companies) relative to some independent and dynamic reference (e.g. some goods and services which price does not depend on energy) should be manifested in a higher pricing power for the company. Our model selects (using the LSQ method) a defining CPI and the best reference index from a set of 92 CPI with estimates started before 2000. This set is fixed what is important for model stability. Both CPIs for a given model must define the studied price for at least 8 months in a row, i.e. the model has to be the same for a relatively long time: the longer – the better. Our model for HPQ is stable and shows an excellent predictive power at a four month horizon for more than 30 months without gaps.

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 February 2012. Below we present five best-fit 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*

*HPQ(t) = -3.40FB(t-5) + 3.60RPR(t-6) – 0.57(t-1990) – 97.72, December 2011*

*HPQ(t) = -3.27FB(t-4) + 3.46RPR(t-5) – 0.39(t-1990) – 95.71, February 2011*

where

*HPQ(t)*is the price in US dollars,*t*is calendar time. All coefficients have been slightly drifting but very close. 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.A month ago, we calculated the evolution of the monthly closing price (adjusted for dividends and splits) for February-June 2012. We predicted the price to fall to $20 in the first quarter of 2012 and then rise to $25 in Q2. Currently, the price is on decline and has fallen to $24. We expect a further fall in the near future (March/April) and then an increase to $25.

Figure 3 depicts the model error. Between July 2003 and February 2012, a standard error is of $2.5 with the current share slightly overvalued.

Figure 1. Evolution of the price of FB and RPR.

Figure 2. Observed and predicted HPQ share price.

Figure 3. The model residual error; sterr=$2.50.

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