3/19/14

Predicting share prices: Avon Products may rise by 50%

Here we revisit our original share price model for Avon Products (NYSE: AVP). In April 2011, this model also showed a higher level of reliability and described the price through March 2011. The AVP model was based on our concept linking share pieces and consumer price indices. The share price model for Avon Products was defined by the index of other household equipment and furnishing (OHEF) and that of public transportations (TPU). Figure 1 illustrates the evolution of these indices. In September 2011, we revised the original model and confirmed that the former CPI component led the share price by 8 months and the latter one led by 5 months.

Here we revisit the model using the monthly closing prices (adjusted for splits and dividends) and CPIs for the period through March 2014. (The CPIs are available only for February 2014.) The principal result is that the underlying model is practically the same as two and a half years ago with practically the same time lags but slightly different coefficients.

Currently, the AVP model predicts that the price is going to rise by approximately \$8 in the first half of 2014. This is equivalent to a 50 per cent return.

Three consequent AVP(t)  models, which cover and are valid for the period between 2010 and 2014, are as follows:

AVP(t) =  -2.43OHEF(t-8) – 0.33TPU(t-5)  - 5.22(t-2000) + 392.49 , March2011

AVP(t) =  -2.25OHEF(t-8) – 0.33TPU(t-5)  - 4.58(t-2000) + 366.41 , September 2011

AVP(t) =  -2.03OHEF(t-9) – 0.32TPU(t-6)  - 4.21(t-2000) + 296.44 , March 2014

where AVP(t) is a share price in US dolalrs, t is calendar time. Both coefficients are negative. The slope of time trend is also negative.  There is some fluctuation in all coefficients caused by the uncertainty in measurements of both the stock prices and the CPIs.  Nevertheless, these three models provide an accurate prediction at a six month horizon as Figure 2 depicts. The predicted curve in Figure 2 leads the observed price by 6 (!) months with the residual error of \$2.97 for the period between July 2003 and March 2014. The model residual for the same period is shown in Figure 3.

Figure 1. Evolution of the price of OHEF and TPU.

Figure 2. Observed and predicted AVP share prices.

Figure 3. Residual error of the model.