Don't know if I will actually do this but a light bulb went off today while I was shopping...went into Guess and as usual the place was packed, nothing on sale and a very attentive sales staff on the floor to assist you...looked around and noticed there were plenty of people in line to purchase their overpriced items so I said to myself "hmmmm, business not too shaby here...." Moved on down the mall to Calvin Klein and noticed EVERYTHING on sale, no floor staff and NO ONE buying anything....I reflected back on a summer trip I made to Chicago and noticed the exact same thing that Guess just flat out is busy most of the time and the Calvin Klein store I went into was dead and EVERYTHING was on sale...got back home, popped up the computer and was able to quickly determine the margins Guess (GES) is making vs. Calvin (PVH) is just a better brand. Realizing PVH encompasses many other brands, this pair trade makes sense to me: Long GES Short PVS Thoughts?
Actually funny you mention the fundamentals lining up because the technicals are lining up to enter this pair now too. This pair currently has a 100day rolling correlation of 83.49% and the ratio chart is approaching an oversold region and currently a trade has been triggered to go long GES & short PVH, you could start your medium/long term position now and scale in at ratio's(GES/PVH) below 0.88 to lower your cost average, reduce risk & improve reward.
Johnny, Thanks for the reply...this one to me looked like a no brainer but I want to dig more into the financials to confirm this...I have not put on a pair before but in this market I feel it is a nice hedge. My only concern is making sure the pair is put on correctly. Do you have any other ideas you can lend if you do pair trade? Regards -
Yeah pairs trading it a good style for this type of market, probably will be for a long time. Ideally you want to be $$$ neutral when putting on a pair trade. So at friday's close for every $1,000 you invest in this pair trade you should buy 16.67 GES shares(500/29.99) and sell short 14.67 PVH shares(500/34.07). The fundamentals on GES/PVH are as follows; GES / PVH PEG 0.62 / 0.76 Profit Margin 10.82% / 6.78% Return on Equity 33.91% / 16.02% Qtr Erngs Gwth 43.60% / -25.30% Current Ratio 2.09 / 2.76 Dividend Yield 1.10% / 0.40% Shares Short 12.20% / 8.10% All the above fundamental measures favour GES over PVH the same as you see in the malls. What I really like about GES vs PVH is that GES has 294M cash / 58M debt whereas PVH has 260M cash / 399M debt. This is very important as currently this market is favouring companies with excess cash and selling short companies with debt exposure as the cost of credit goes up and availability of debt goes down so GES has a much more robust balance sheet against PVH. I'm glad you brought this pair to my attention as I don't normally scale into long term pair trades however I like this one and Il be looking to scale in around ratio 0.88 and looking to exit on new 6mth ratio highs above 1.10, Im committing a small portion of my a/c to this trade and I want to exit within 6 months so I may scale out before ratio 1.10 as I see fit.
Hope it works out for you..in the past, what is your threshold and getting out of a pair if it put on backwards? Thanks
What is the potential profit, and what time frame? I do not trade pairs, I trade futures. Just courious. seadog
seadog, the potential profit is +25% on the total amount invested, that is $$$ neutral and I aim to be out within 6 months.
I have my own version of this trade... Short Abercrombie & Fitch, ANF Long Urban Outfitters, URBN wait 4 months and collect $$$