Which Honeywell Five Year Forecast: Mine or Theirs?

Tonight on CNBC's Mad Money (here), host Jim Cramer interviewed the CEO of Honeywell. What caught my attention, listening to the interview (video above), was Cramer's statement that Honeywell (HON) "...is a cyclical business. In other words, its performance is dependent on the health of the U.S. and global economies".

To the ears of a Random Stock Walker, this means that HON should be neither a random walk nor a business-as-usual stock. It should be clearly linked to cyclical components of either the US or the World economies. The statistical estimation and comparison of state space models supports the assertion. HON is clearly linked to the world economy and especially to cyclical components of the world economy.
Jim Cramer actually used the term "hostage" to cyclical components of the US and World economies. He went on to imply that something had changed with current management and that the company had now become better able to resist cyclical downturns.

Let's compare the "bullish" Honeywell 5-year forecast to a 15-year Random Stock Walker forecast. The bootstrap forecast using the model linking HON to the world economy (this is the best model) does suggest that trends in the world economy (cycles generated by oil shocks?) will not be working in Honeywell's favor.

The graph above displays the long-run attractor for HON. The stock is very choppy, the instability being more a function of shocks rather than cycles in the world economy. The analyst opinion of HON is also not very positive with four out of ten research firms rating it a downgrade. From the Random Stock Walker perspective the price targets are still optimistic with the median target being 64.50, the high target being 71 and the low target being 40. The 98% confidence bands for the bootstrap forecasts never get above sixty and over time get well below 40. Unless something has actually changed, HON looks like a great candidate for the short sellers and their 5-year forecast looks very bullish indeed.

THEORY and METHOD: Honeywell is an interesting example of a company that might have changed with a change in management around 2006. There is not quite enough statistical data to determine whether there has been a break in Honeywell stock performance. This is a good example of a case where statistical forecasting may not be justified. It will be interesting to look back after a few years, test to see whether there was a break in 2006 and see whether the new Honeywell model is really different from the old.