Avery Dennison share price will likely be falling further

In April 2011, we presented a model for Avery Dennison Corporation (AVY) based on our concept linking share pieces and consumer price indices. The share price model for Avery Dennison Corporation was defined by the index of food (F) and that of new and used motor vehicle (NUMV). In the original model, the former CPI component led the share price by 4 months and the latter one led by 2 months.

Here we revisit the model using the monthly closing prices (adjusted for splits and dividends) and CPIs for the period through September 2011. (The CPIs are available only for August 2011.) The principal result is that the underlying model is practically the same as six months ago with the same time lags but slightly different coefficients. In March 2011, we predicted a fall in the price which actually happened. Currently, the share price is overestimated if to consider that the predicted price expresses the right behavior. We expect that AVY stocks will be falling by the end of 2011 down to $16 per share from the September closing level $25.08.  

Figure 1 depicts the overall evolution of both involved indices between July 2005 and August 2011. These two defining components provide the best fit model between January 2010 and September 2011.  Both models, the original and the updated one, are shown below. The best-fit 2-C models for AVY(t) are as follows 

AVY(t) =  -4.24F(t-4) – 3.23NUMV(t-2)  + 23.29(t-1990) + 799.24 , March2011

AVY(t) =  -3.92F(t-4) – 2.70NUMV(t-2)  + 21.60(t-1990) + 710.60 , September 2011 

where AVY(t) is a share price in US dolalrs, t is calendar time. Relevant coefficients are both negative. The slope of time trend is positive.  There is some fluctuation in the coefficients caused by the uncertainty in measurements of both the stock prices and CPIs.  Nevertheless, both models provide an accurate prediction at a two-month horizon.  

The predicted curve in Figure 2 (both versions are depicted) leads the observed price by 2 months with the residual error of $2.57 ($2.68 in April) for the period between July 2003 and September 2011. The model residual for the same period is shown in Figure 3. The original model predicted the share price in the past and foresaw a fall in 2011 Q2.  

Figure 1. Evolution of the price of F and NUMV. 

Figure 2. Observed and predicted AVY share prices. Upper panel – March 2011; lower panel – September 2011. 

Figure 3. The residual error of the model. The mean residual error is 0.0 with the standard deviation of $2.57. Currently, the price is slightly overestimated.