Long Safeway and Shorting Kroger
Submitted by WSN_Staff on Sat, 08/28/2010 - 11:06.
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If you ask Cort Gwon from FBN Securities he recommends going long Safeway Inc. (NYSE:SWY) and short The Kroger Co. (NYSE:KR) according to this weekend's Barron's article.
Safeway Inc (SWY) shares have traded between $18.75 and $27.04 over the past 12 months. Safeway shares are now trading with a P/E Ratio of 0 and EPS of -3.13 and its shares are just 3.6% from its 52-week low. Safeway shares closed the day at $19.45 on Friday, down -0.71% or 14 cents.
Over the past 12 months Kroger Co (KR) shares have traded between $19.08 and its 52-week high of $24.80. Kroger Co shares are now trading with a P/E Ratio of 1047.9 and EPS of 0.02 and its shares have moved up 6.15% from its 52-week low. KR shares closed Friday trading at $20.33, down -0.15% or 3 cents.
From Barron's -- "When stock picking is difficult, it's a great environment for pair trades," says Cort Gwon, director of trading strategies and Research at FBN Securities. By putting an equal amount of dollars in the stocks of two companies in the same industry, one stock purchased and the other sold short, the investor is less exposed to the mood swings and macro worries that drive the broad market.
Gwon screens for unusual divergences between market leaders whose stocks have been highly correlated historically. When one underperforms the other significantly enough for about three months, he recommends buying the underperformer and selling short the outperformer. "Something has broken down in the relationship between the two stocks and you don't know what it is, but you are betting it's not a significant factor and that the spread between them will return to normal," he says.
If both stocks go up or down by the same percentage, the return is zero. But if, as expected, the long position rises more than the short, or the shorted stock falls more than the purchased one, a positive return is generated. Gwon refreshes his portfolio of about 21 pair trades regularly. The average monthly total return of each pair is 1.4%, but he recommends investing in a portfolio of trades rather than single pairs.
Lately he has recommended buying grocer Safeway (ticker: SWY) and shorting Kroger (KR). Though the two stocks usually are more than 90% correlated, Safeway is down about 11% since late May and Kroger is up 3%.
SOURCE: http://online.barrons.com/article/SB500014240529702040144045754559530984...
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