Modeling Share Prices: JDS Uniphase To Hold

Apr. 1.14 | About: Viavi Solutions (VIAV)

Summary

We have developed a share price model for JDS Uniphase as based on consumer price index of postage and delivery services together with index of all items less energy.

The JDSU price follows the index of postage and delivery services.

The model standard error is $3.38 since July 2003 that corresponds to the level of intermonth price fluctuations.

Here we model the evolution of JDS Uniphase Corporation (JDSU) stock price. JDSU is a company from technology sector which;

provides communications test and measurement solutions, and optical products for telecommunications service providers, wireless operators, cable operators, network-equipment manufacturers, original equipment manufacturers, enterprises, government organizations, distributors, and strategic partners worldwide.

The model has been obtained using our concept of stock pricing as a decomposition of a share price into a weighted sum of two consumer price indices (CPIs). The background idea is a simplistic one: there is a potential trade-off between a given share price and goods and services the company produces and/or provides. For example, the energy consumer price does influence the price of energy companies. It should be taken into account that one defining consumer price (or relevant CPI) has to be related to the share and the other CPI should be an independent one as representing a dynamic reference. We expect a higher relative growth of the defining CPI to manifest itself in a higher pricing power for the company. Both defining CPIs may lead the price or lag behind by a few months.

We have borrowed the time series of monthly closing prices of JDSU from Yahoo.com, and the relevant (seasonally not adjusted) CPI estimates through February 2014 are published by the BLS. It is instructive that the evolution of JDSU share price is defined by the consumer price index of postage and delivery services [POST] and the index of all items (the headline CPI) less energy index [CE]. The defining time lags are as follows: the CE index leads the share price by 4 months and the POST index is contemporaneous with the price. The relevant best-fit model for JDSU(t) is as follows:

JDSU(t) = 0.934POST(t-0) - 3.14CE(t-4) + 7.49(t-2000) + 486.18, February 2014

where JDSU(t) is the JDSU share price in U.S. dollars, t is calendar time. Figure 1 displays the evolution of both defining indices since 2002. Figure 2 depicts the high and low monthly prices for JDSU share together with the predicted and measured monthly closing prices (adjusted for dividends and splits).

The model is stable over time. Table 1 lists the best fit models, i.e. coefficients, b1 and b2, defining CPIs, time lags, the slope of time trend, c, and the free term, d, for 7 months. In 2012, the same model was obtained, as listed in Table 2. Therefore, the estimated JDSU model is reliable over time. For 2010 and 2011, the model included another reference CPI - the consumer price index of alcohol beverages, AB, which has cross correlation coefficient 0.996 with CE (see Figure 1). Statistically, the model for 2010/2011 was indistinguishable from the current version. The model residual error is shown in Figure 3. The standard deviation between July 2003 and February 2014 is $3.38.

Considering the overall evolution of the POST and CE indices, we do not expect significant changes in JDSU price. The difference between the headline CPI and the energy index is on a negative trend, i.e. the CPI grows at a higher rate than the consumer energy price. The index of all items less energy gets some acceleration, and this might be a general factor suppressing the JDSU price, since CE has a negative coefficient. The growth in POST index has a positive effect, and we observe a few steps affecting the JDSU price in the past. Such a step may raise the price.

Table 1. The best fit models for the period between August 2013 and February 2014

Month b1 CPI1 lag1 b2 CPI2 lag2 c d sterr, $
February 2014 0.9337 POST 0 -3.1359 CE 4 7.4919 486.1826 3.3783
January 2014 0.9732 POST 0 -3.1225 CE 4 7.2528 479.9811 3.3666
December 2013 0.9786 POST 0 -3.1091 CE 4 7.1699 477.1218 3.3797
November 2013 0.9763 POST 0 -3.1464 CE 4 7.3463 483.8175 3.3926
October 2013 0.9855 POST 0 -3.1293 CE 4 7.2357 479.8867 3.4003
September 2012 0.9872 POST 0 -3.1443 CE 4 7.2982 482.2951 3.4122
August 2013 0.9872 POST 0 -3.1284 CE 4 7.227 479.5591 3.4261
Click to enlarge

Table 2. The best fit models for 2012:

Month b1 CPI1 lag1 b2 CPI2 lag2 c d sterr, $
December 1.163 POST 0 -3.131 CE 4 6.466 463.155 3.33
November 1.163 POST 0 -3.126 CE 4 6.433 462.370 3.33
October 1.164 POST 0 -3.116 CE 4 6.386 460.441 3.33
September 1.158 POST 0 -3.105 CE 4 6.351 459.243 3.32
August 1.154 POST 0 -3.112 CE 4 6.392 460.948 3.32
July 1.156 POST 0 -3.129 CE 4 6.461 463.677 3.32
June 1.190 POST 0 -3.143 CE 4 6.370 461.592 3.31
May 1.214 POST 0 -3.171 CE 4 6.408 463.963 3.29
Click to enlarge

Figure 1. The evolution of POST and CE indices:

Figure 2. Observed and predicted JDSU share prices:

Figure 3. The model residual error: stdev=$3.38.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.