Here we model the evolution of Lincoln National Corporation (LNC) stock price. LNC is a company from financial sector which, according to Yahoo Finance:
is engaged in multiple insurance and retirement businesses in the United States.
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 of lag behind by a few months.
We have borrowed the time series of monthly closing prices of LNC 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 LNC share price is defined by the same consumer price indices as for Morgan Stanley: the index of food away from home (SEFV) and the index of owner's equivalent rent of residence (ORPR). Both defining time lags are one month, i.e. one has a one month prediction for LNC using contemporary CPIs. The relevant best-fit model for LNC(t) is as follows:
LNC(t) = -9.39SEFV(t-1) + 4.38ORPR(t-1) + 35.65(t-2000) + 647.76, February 2014
where LNC(t) is the LNC 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 LNC 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 LNC model is reliable since May 2012. The model residual is shown in Figure 3. The standard deviation between July 2003 and February 2014 is $4.12.
The model for MS is very similar to LNC:
MS(t) = -7.57SEFV(t-0) + 4.26ORPR(t-2) + 23.66(t-2000) + 398.90; February 2014
One could expect a similar price evolution. This was true before 2012, but as Figure 4 demonstrates, the increase in LNC price since 2012 was much larger than that for MS. This is the effect of a larger absolute value of coefficient b1 and the change in SEFV slope around 2012. (Notice that coefficients b2 are very close for LNC and MS.) With the expected return of food price to its long term trend, LNC will likely suffer a negative correction in the first half of 2014.
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 SEFV and ORPR indices
Figure 2. Observed and predicted LNC share prices.
Figure 3. The model residual error: stdev=$4.12.
Figure 4. Comparison of MS and LNC.
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.