In this article, we introduce a
tentative pricing model for TECO Energy (NYSE: TE). This is one of many energy related
companies in the S&P 500 index. Our pricing model is based on our concept
of stock dependence on consumer price index. The intuition is simple and clear, the
evolution of a share price is inherently related some goods and services and
thus the evolution of their relative prices. For example, it is not easy to ignore the intuition
that crude oil has to affect share prices of oil companies. We have reported
that such a link exists for ConocoPhillips
and formulated an empirical model. On the other hand, the oil price is not the
only changing price and other goods and services should obviously affect share
prices of oil companies. Thus one needs also some reference price, which best expresses
the overall price evolution. An example from life, when one jumps in a moving
elevator the net trajectory depends on both the person and elevator.
Therefore, our model is seeking two
CPI components from a large number of pre-selected ones, which minimize the
difference between observed (monthly closing price adjusted for dividends and
splits) and predicted prices for the period between July 2003 and October 2012.
For TE, we use a set of 92 individual consumer price indices to select the best
two CPIs in order to describe the evolution of the share price. Our
two-component model also includes a free term (constant) and a linear time term,
which compensates well know linear (time) trends between various CPI
components. We allow the modeled share price to lead and lag behind one or both
defining CPIs. When the price is lagged, the model is deterministic one and
foresees at the horizon of the smallest lag. When the price leads both CPIs,
one cannot predict the future of the price but get some information on the future
CPIs. In the case of TE, both CPIs are
contemporary to the share price and the best-fit model is as follows:
TE(t)= -1.43R(t-0)
+ 0.05E(t-0) + 1.49(t-2000) + 150.92, October
2012
where R(t) in
the index recreation at time t, E is the index of energy also contemporary
to the price, (t-2000) is the
elapsed time.
Figure 1 depicts the evolution of both CPIs. The index of recreation evolves slowly and the
energy index has been actually driving the TE price since 2003. Figure 2
depicts the observed and predicted (monthly closing) prices together with the monthly
high/low prices, which are natural limits of the intermonth price uncertainty.
Our model correctly predicted the price since 2003. The model residual error is shown in Figure 3.
It has standard deviation of $0.85 for the period between July 2003 and October
2012.
For an investor, the evolution of TE is almost fully
related to the price index of energy. Our
model of oil price evolution implies a fall to $40 to $60 by 2016. This may
induce a fall in energy prices in the long run and the TE price will be on a
down ward trend as well. On this long term trend, there should be periods of
high fluctuations associated with elevated market volatility. When the actual
price is far below the predicted price, one may consider a profitable (in the
short run) share purchase. When the actual price is far above the predicted
price, it is best time to sell. Currently, the predicted and observed prices
are almost equal. No action needed.
Figure 1. The evolution of defining CPIs.
Figure 2. Observed and predicted TE share prices.
Figure 3. The model standard error is $0.85.
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