Paired Trades: Sell Collective Brands, Buy Shoe Carnival

This is the 6th in a series of articles that attempt to identify relative value discrepancies between two closely related securities. So far, the first five (but not the most recent one - ouch!) have been modestly successful in aggregate, though it's a little early to be drawing conclusions:

		BUY	SELL
		MPR	NLC
13-Mar		7.30	11.99
22-Jun		10.21	16.00
		39.9%	33.4%	3.2%
		JNJ	AGN
17-Apr		53.05	49.49
22-Jun		56.09	46.48
		5.7%	-6.1%	5.9%
		COLM	UA
1-May		30.36	24.00
22-Jun		32.17	22.05
		6.0%	-8.1%	7.0%
		BCR	ISRG
8-May		73.52	158.77
22-Jun		74.35	161.15
		1.1%	1.5%	-0.2%
		EZPW	AAN
5-Jun		13.09	32.85
22-Jun		10.88	30.99
		-16.9%	-5.7%	-5.6%

For reference:

• 3/14: Buy Met-Pro (MPR), Sell Nalco Holding (NLC)
• 4/18: Buy Johnson & Johnson (JNJ), Sell Allergan (AGN)
• 5/3: Buy Columbia Sportswear (COLM), Sell UnderArmour (UA)
• 5/10: Buy C.R. Bard (BCR), Sell Intuitive Surgical (ISRG)
• 6/6: Buy EZCORP (EZPW), Sell Aaron's Rents (RNT)

  Today's idea is driven primarily by the sell, Collective Brands (PSS), which I find to be very expensive relative to a host of competitors. I have written about Shoe Carnival (SCVL) in the past on several occasions, including late 2007, August 2008 and as part of a review of the first year of my Top 20 Model Portfolio (of which it is still a member). I follow the shoe and shoe-related companies fairly closely and could select any number of other companies against PSS. As you can see in the table below (click to enlarge), it has one of the worst balance sheets but a fairly high valuation:

  

  While I highlighted Timberland (TBL) and DSW as well, I chose SCVL as the other side as it remains so inexpensive. In addition to a pristine balance sheet and high inside ownership, this retailer had a great report recently, reducing absolute inventory and per-store again. The company isn't too exciting - focused singularly on selling shoes to women, men and children in low-income markets in the Southeast. Here's the comparison:

  

  Don't be fooled by the low PE - PSS has a lot of debt and EV/EBITDA is a more appropriate metric. Historically, the vertically integrated PSS (which admittedly has more moving parts) hasn't really had better margins than SCVL, but note that the EV/Sales ratio is more than double that of SCVL. PSS is scaling back, while SCVL, with its strong balance sheet, is taking advantage of great real estate conditions to grow selectively. With the economic headwinds likely to be protracted, it makes little sense to pay up to own PSS when SCVL and so many other similar companies are as cheap if not cheaper with less financial risk.

  Disclosure: Long SCVL

Comments

[Fred Swartz:]

Based on your disclosure statemenst, you don't pursue a long-short strategy, which would seem ideal for pairs.

I'm curious about the reasons for this: too risky, you don't think it works well, not appropriate for your business, unable to short many of the stocks, ...?

Jun 21 04:08 PM

[Old Trader:]

Fred,

You bring up some good questions; hopefully the author will respond. That was always my take on the definition of a "pairs trade", a combo of a long and a short, like long oil/short airlines, or vice versa.


On Jun 21 04:08 PM Fred Swartz wrote:

> Based on your disclosure statemenst, you don't pursue a long-short
> strategy, which would seem ideal for pairs.
>
> I'm curious about the reasons for this: too risky, you don't think
> it works well, not appropriate for your business, unable to short
> many of the stocks, ...?

Jun 21 08:34 PM

[Alan Brochs...:]

Great question. In my business, I do advise clients on both longs and shorts. In my very personal trading, I use only ETFs. I do manage a long-only account for a family member (a charitable foundation). When I disclose a long, that is where I maintain exposure, even though I don't directly benefit in any way.


On Jun 21 04:08 PM Fred Swartz wrote:

> Based on your disclosure statemenst, you don't pursue a long-short
> strategy, which would seem ideal for pairs.
>
> I'm curious about the reasons for this: too risky, you don't think
> it works well, not appropriate for your business, unable to short
> many of the stocks, ...?

Jun 21 09:26 PM

[Fred Swartz:]

Thanks for the clear answer. I find it somewhat curious that you (as well as others) make recommendations, but don't "eat your own dog food". Is this to avoid any taint of "pump and dump" or "front running"?


> Great question. In my business, I do advise clients on both longs
> and shorts. In my very personal trading, I use only ETFs. I do
> manage a long-only account for a family member (a charitable foundation).
> When I disclose a long, that is where I maintain exposure, even though
> I don't directly benefit in any way.

Jun 23 11:09 PM

[Alan Brochs...:]

One of my goals is to minimize front-running appearances (I assure you that there is no "pump and dump"). It's tough when advising others. I always disclose my position to my clients, and I have rules that govern my adding to or selling of my position when I formally recommend it to a client. As I said, in my own personal accounts, I just use ETFs. Very rarely would I formally recommend a stock as a long that I don't own in the charitable foundation account that I mentioned. Obviously I disclose all positions when I contribute to Seeking Alpha and abide by the rules that govern their "gold" certification.

Jun 24 05:00 PM

[bminfo247:]

Yahoo Finance has some information on this sector available at the following link:
finance.yahoo.com/news...

Sep 11 10:55 AM