Measuring share price behavior: the CAC40 case study

As I mentioned last week in my article, “How to measure stock reputation”, the first thing that is required is to analyze the share price behavior of company on its stock market. For this case study, I have decided to look at companies of the CAC40, the largest French stock index.

Erratic share price movements

Erratic daily share price movements represent a risk for investors and are an important factor of stock reputation. To measure these movements, I looked at the last three years and determined the number of days when the share price materially deviated (more than 3.5%) from the CAC40 index. I found that, on average, a company’s share price has erratic movements six times a year. That corresponds to a 2.4% probability on average. That being said, without surprise, the portion of erratic daily share price movements varies greatly from one company to another.

Air Liquide appears with the lowest rate of erratic share price movements.  In three years, the industrial gas world leader only had one erratic share price movement. Following a disappointing annual results announcement on February 17^th, 2012, its share price fell by 2.8%, whereas the CAC40 was up 1.4%. There have been no surprises since.

On the contrary, Alcatel-Lucent, the telecom equipment company, has had an exceptionally volatile and unpredictable stock market performance. Approximately every seven days, its share price performance deviates significantly from the market. Almost all announcements from the company or third party lead to a strong share price reaction. For example, at end October last year, Q3 results led to an increase of 16.1% of the share. Two weeks before that, its share price went down 6.2% following an estimate downgrade from Morgan Stanley.

Share price deviation from its trend

The share price deviation from its trend is the second biggest risk for an investor and a shareholder. The less it deviates, the highest the stock reputation and vice-versa. To measure this deviation, I calculated the standard deviation of share price variations compared to its 200-day moving average. Once again, I did this calculation over the last three years. Results are once again very different from one company to another but give similar conclusions to the ones concerning erratic share price movements.

Air Liquide has also the best rating on those criteria. Over the last three years, on average, its share price has deviated by only 3.3% from its trend. On the contrary, Alcatel-Lucent is exceptionally volatile. Between February 2012 and August 2012, its share price has been divided by two.  The share took back 80% over the next six months and, then, has been multiplied by three during 2013. It was once again divided by two over the first nine months of 2014 and, recently took back more than 75% in three months.

Conclusion

By combining results concerning erratic share price movement and the ones concerning share price deviation from trend, it is possible to give a share price behavior rating to each company. This rating will give a first stock reputation measurement. In the current case study, without surprise, Air Liquide has the best rating and Alcatel-Lucent has the worst.