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
Table 2. The best fit models for 2012:
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.