Will the Apple "Run Up" Continue?

For the first post on this blog, I thought I'd analyze one of the current market darling stocks, Apple Computer (AAPL). The analysis in the "Random Stock Walker" will be based on a simple idea: as an investment, you probably want to stay away from stocks that are a random walk (you can read more about the well-known random walk hypothesis here and here). On the other hand, you probably would want to own a stock that was strongly linked to the secular and/or cyclical growth of the U.S. or world economy (if you follow Jim Cramer on CNBC, for example here, you've probably heard this pitch before).

I have a statistical technique that can be used to tell whether a stock is a random walk or whether the stock is being driven by secular and/or cyclical trends in the economy. I have used the approach to analyze stock market bubbles (here) and a few stocks (GM--here and here--and Cummins, here). Let's see how it applies to Apple Computer.

Apple's stock price history and the step-ahead predictions of the best model are displayed above. The AAPL stock price is not a random walk (GM is) and is well-predicted by secular and cyclical trends in the US economy.
The Apple stock price is also affected by random events. If we eliminate error variation from the model and simulate the model (solve the model over time) from 1985, we get the graph displayed above. There were times when AAPL was over-priced relative to its long-run growth path (e.g., around 2000) and times when it was under-valued (2001-2005). Right now, AAPL is slightly over-valued. Will the stock price continue rising in 2011?
We can't know the future but we can run the model forward in time and add 98% bootstrap prediction intervals to the forecast (above). The model suggests that AAPL will return to a lower equilibrium growth path and remain there for the next few years.

DISCLAIMERS: Whether a stock is or is not a random walk might prove to be a useful screening device for drawing your attention to investment grade stocks, but the analysis and the forecasts I will provide in this blog are not meant to be used for purchase or sell decisions. For that, you will have to do a lot more homework about the company and consult the many other sources that are available on the Internet (here, for example).

My main purpose for starting this blog is to see, over the next year, how happy I am with the forecasts and analysis generated by the models. Hopefully, we can look back in a year or two and learn something about how skillful the techniques are.