After Pitney Bowes (PBI), we would like to present a deterministic price model for a technology company from the S&P 500 list. This time we present a company from technology category - Harris Corporation (HRS) which "operates as a communications and information technology company that serves government and commercial markets worldwide". The model is a deterministic one since we decompose HRS share price into a weighted sum of two consumer price indices, both leading the price by several months. One cannot deny the fact that there exists an inherent trade-off between shares of a given company and goods and services it produces/provides. Therefore, one might assume the growth in a CPI related to HRS (e.g. information technology) relative to some independent but dynamic reference consumer price (e.g. food) should be manifested in a higher pricing power for the studied company. It so happened that both involved CPIs lead the share price. In other words, a HRS share price accommodates all changes in the overall price of information technology with a time lag of several months. Those who know that have a good statistical reason to beat the market.
All in all, our stock price model tries to find one defining CPI and the best reference CPI. Both CPIs are taken from a set of 92 different (not seasonally adjusted) CPIs and the best model has the smallest RMS error between July 2003 and February 2012. This set is not a complete one but includes the headline and core CPI, all major categories from food to other goods and services, and many minor subcategories with long enough history (i.e. continuous estimates should be available since 2000). One can extend this set and might obtain a more robust model.
We have borrowed the time series of monthly closing prices of HRS from Yahoo.com (February 2012 is included) and the CPI estimates through January 2012 are published by the BLS. As mentioned above, the evolution of HRS share price is defined by the consumer price of the index of information technology (IT) and the index of food (F). The defining time lags are six and four months, respectively. The best-fit model for is as follows:
HRS(t) = -2.76F(t-4) - 10.39IT(t-6) + 8.53(t-1990) + 553.00, February 2012
where HRS(t) is the HRS share price in U.S. dollars, t is calendar time. Figure 1 displays the evolution of both defining indices since 2002. In the empirical model, both indices have negative slopes and the IT index defines the growth of the price. Higher food prices suppress the level of HRS share price.
Figure 2 depicts the high and low monthly prices for a HRS share together with the predicted and measured monthly closing prices (adjusted for dividends and splits). The predicted prices are well within the limits of the share price uncertainty. The model residual error is shown in Figure 3 with the standard deviation between July 2003 and January 2012 of $3.42.
Due to the sensitive balance between the growth in food price and the fall in the IT index the share price has many peaks and troughs. Currently, this proportion between the growth rates of the F and IT indices has moved the predicted HRS price far from the observed one. Hence, we can not exclude that the actual price will fall by a few dollars by May 2012. A similar correction was observed in 2008.
Figure 1. The evolution of defining indices.
Figure 2. Observed and predicted monthly closing prices for a HRS share.
Figure 3. The model residual error: sterr=$3.42.