So its been about a year and a half since I started my Tickerspy portfolio. Since inception it has returned 39.6% and has beaten the S&P by 62.4 percentage points.
At the beginning of the week I made several changes to the portfolio. I got rid of my Autonation holding which had a return of over 100% and replaced it with a pair trade of long Walmart and short Nordstrom’s. The portfolio already had a slight hedge via SH, an ETF that is short the S&P500. The portfolio is also short both ERX and ERY, the triple-leveraged energy ETFs.
Thus, as it stands the portfolio still has 7 long positions and 4 short positions. Or, to be more accurate, two pair trades, a short position, and six long positions. I look forward continuing to outperform the S&P500 via Tickerspy.
Excellent performance Doug.
How do you go about selecting a pair trade? I’ve never tried but since it is still a short, what type of analysis do you perform?
Well, I have not read much about pair trades, but here are a few things that I have pondered in creating a paired trade.
First, and most obvious, I feel a paired trade is about selecting one stock that you think will outperform and another that you feel is destined to underperform. Another way to think about this is to go long a stock that is trading at a large discount and short another stock in the same industry that is trading at a smaller discount (or a premium).
Second, I think you should always look at the balance sheets of both companies you are considering for a paired trade. If one has more debt and is more leveraged than the other, this might be a negative or positive feature. If one company has a finance division that lends money to enable its consumers to purchase its products, this could very well be a negative feature when people are losing jobs and out of work, especially when compared to the company whose customers pay mostly in cash.
Third, look at the management and the board of directors of each company. Does one company seem to be more shareholder-friendly than the other? Does one company’s board seem to be less independent and more complacent than the other company’s board? A complacent and dependent board is definitely a negative quality.
Finally, considering the macro issues should probably be one of the last things you should do. In the case of the Walmart/Nordstrom paired trade, the macro issue to consider is that for the foreseeable future (if there is such a thing!) its very likely people are going to be spending less on luxury items and spending more time on saving money by going to places like Walmart.