4/6/14

Predicting share price:Loews Corporation may grow to \$59 in June

We have been reporting on the performance of our share price model for Loews Corporation (NYSE: L) since 2010. Loews operates primarily as a commercial property and casualty insurance company”. In November 2012, we presented a model including data available for October 2012. Here we update the model with the closing price through March 2014 and the (not seasonally adjusted) consumer price indices for February 2014.
Our model decomposes a share price into a weighted sum of two consumer price indices (selected from 92 CPIs), linear trend and constant; all coefficients and time lags to be estimated by a LSQ procedure. For L, the same model is valid since November 2008 and does not show any clear sign of changes in the future. This is a reliable model valid during the past 65+ months!
A preliminary model for Loews Corp. was obtained in September 2009 and covered the period from November 2008. This initial model included the index of food without beverages (FB), which led by 6 months and the index of transportation service (TS) with a 4 months lead:

L(t) = -2.52FB(t-6) – 1.38TS(t-4) +27.93(t-1990) + 377.24, stdev=\$2.04,  September 2009

where L(t) is the share price in US dollars, t is calendar time. Since November 2010, the defining indices were the same: the index of food and beverages (F) and the TS index. Figure 1 depicts the evolution of the indices, which provide the best fit model. (The difference between F and FB is just marginal.) The food and beverages index leads by 5 months and the TS index by 4 months.  Table 1 demonstrates that the original model does not show any tangible change with time - only coefficients have been slightly fluctuating:

L(t) = -2.04F(t-5) – 2.08TS(t-4) +28.09(t-1990) + 441.81, Nov 2010

L(t) = -2.03F(t-5) – 2.12TS(t-4) +28.23(t-1990) + 448.98, Mar 2011

L(t) = -2.01F(t-5) – 2.09TS(t-4) +27.96(t-1990) +440.65, Sep. 2011

L(t) = -2.03F(t-5) – 2.02TS(t-4) +27.65(t-1990) +431.99, Dec 2011

L(t) = -2.01F(t-5) – 2.01TS(t-4) +27.49(t-1990) +428.70, Feb 2012

L(t) = -2.00F(t-5) – 1.96TS(t-4) +27.18(t-2000) +693.99,  Sep 2012

L(t) = -1.89F(t-5) – 1.93TS(t-4) +26.23(t-2000) +670.12, Mar 2014

The current model is depicted in Figure 2 together with high and low monthly prices as a proxy to the uncertainty bound of the share price. The predicted curve leads the observed one by 4 months. The solid red line presents the contemporary prediction, i.e. one sees four months ahead. Major falls and rises are well forecasted four months in advance. The model residual error is of \$2.61 for the period between July 2003 and March 2014, as shown in Figure 3.

Figure 2 predicts a significant rise in L share price – to \$59 in June. With the current level of \$45 it makes 30% in three months. With the longer record of successful price prediction at a three months horizon we cannot exclude a significant (much larger than the standard error) positive correction.

Table 1. Selected models for the period between November 2008 and March 2014.

 Month b1 CPI1 lag1 b2 CPI2 lag2 c d Mar-14 -1.890 F 5 -1.928 TS 4 26.235 670.116 Feb -1.913 F 5 -1.918 TS 4 26.321 671.512 Jan -1.961 F 5 -1.919 TS 4 26.628 678.268 Dec-13 -1.993 F 5 -1.919 TS 4 26.856 683.139 Nov -1.996 F 5 -1.920 TS 4 26.876 683.735 Oct -1.991 F 5 -1.914 TS 4 26.808 681.817 Sep -1.991 F 5 -1.928 TS 4 26.889 684.539 Aug -1.986 F 5 -1.927 TS 4 26.848 683.596 Oct-12 -1.999 F 5 -1.947 TS 4 27.097 689.405 Sep -2.002 F 5 -1.952 TS 4 27.147 690.783 Aug -1.996 F 5 -1.953 TS 4 27.096 689.968 Jul -1.999 F 5 -1.958 TS 4 27.140 691.539 Jun -1.994 F 5 -1.956 TS 4 27.092 690.232 May -1.993 F 5 -1.960 TS 4 27.107 689.991 Apr -1.998 F 5 -1.963 TS 4 27.159 691.350 Mar -2.002 F 5 -1.964 TS 4 27.185 692.307 Dec-10 -2.040 F 5 -2.085 TS 4 28.090 441.815 Nov -2.041 F 5 -2.073 TS 4 28.028 437.890 Oct -2.047 F 5 -2.074 TS 4 28.078 436.265 Sep -2.031 F 5 -2.079 TS 4 27.999 433.271 Aug -2.041 F 5 -2.074 TS 4 28.035 430.991 Jul -2.086 F 5 -2.016 TS 4 28.023 424.383 Jun -2.115 F 5 -1.988 TS 4 28.064 420.540 May -2.228 F 5 -1.868 TS 4 28.194 410.849 Aug-09 -2.523 FB 6 -1.380 TS 4 27.927 377.241 Jul -2.568 FB 6 -1.378 TS 4 28.165 379.330 Jun -2.613 FB 6 -1.352 TS 4 28.286 377.759 May -2.621 FB 6 -1.352 TS 4 28.336 376.243 Apr -2.641 FB 6 -1.349 TS 4 28.431 375.306 Mar -2.656 FB 6 -1.373 TS 4 28.596 378.046 Feb -2.550 FB 6 -1.373 TS 4 28.037 365.204 Jan -2.399 FB 6 -1.352 TS 4 27.098 344.684 Dec-08 -2.337 FB 6 -1.321 TS 4 26.611 331.821 Nov -2.323 FB 6 -1.313 TS 4 26.497 327.081

Figure 1. Evolution of the price indices F and TS.

Figure 2. Observed and predicted share prices.

Figure 3. The model residual error; stdev=\$2.61.