Coming up with a good pair trade requires authors to do a little bit more than make a compelling investment case. There's also the need to think about the relationship between two stocks and to consider whether the pairing reduces the market risk involved. And then there's the whole trick about getting the direction of the trade right.
Our pair trade contest, the third we've run on Seeking Alpha, saw over 80 authors send in entries presenting investment ideas that answered the theme, "Here's why I'm buying company X and selling company Y." We published nearly 70 articles, many of them compelling and which generated great comment stream discussions. We spent a good deal of time last week deliberating on the top three, and we're excited to share our winners.
As a reminder, here's the criteria we used to select winners:
- Do you make a clear case for why the market has these two stocks' relative values wrong?
- Are there clear catalysts to drive upside/downside or to change the stocks' relative value?
- Do you make a case for why the stocks are related and why one will outperform the other?
- How is the risk/reward here skewed in investors’ favor?
- How material is your thesis to the stocks' respective prices?
- Do you present an original thesis on the stocks?
- How did readers react?
Our top three prize winners are:
- Focus Equity - Long Level 3 Communications / Short Netflix. Prize: $2500 and 3 months of access to SA PRO.
- Ian Bezek - Long Taro Pharmaceuticals / Short Gilead Sciences. Prize: $1500 and 2 months of access to SA PRO.
- Kevin Feeney - Long Cameco Corporation / Short Uranium Energy Corp. Prize: $1000 and 1 month of access to SA PRO.
Each of the articles is available to all readers for at least the next two weeks.
Focus Equity's article managed to present a new perspective on one of the best-known (and most dangerous) positions in the market over the past few years, a Short Netflix idea. There were, conveniently, three key tenets in Focus Equity's long LVLT / short NFLX case. First, that Level 3 Communications (NASDAQ:LVLT), as a data services provider, benefits from the same trends Netflix (NASDAQ:NFLX) does - the growth in IP traffic and in online TV and other streaming entertainment options. Second, that Level 3 Communications benefits from the same things that threaten Netflix's future growth, namely the influx of competitors such as Hulu, HBO, and Sling. If you expect Netflix's growth to continue to attract competition, this bodes well for Level 3 Communications, especially given the latter company's high degree of fixed costs as compared to Netflix. Lastly, there's the most well-discussed tenet, the relative valuation between the two companies, which suggests the market isn't pricing in the same benefits for Level 3 Communications that it is for Netflix. The fresh angle and compelling thesis led us to pick this as our winner.
Ian Bezek (our first repeat prizewinner) also presented the bear case for a well-known stock. While not an explicit short thesis, Bezek did a very nice job of explaining why the market may be right to price Gilead Sciences (NASDAQ:GILD) at a 13x PE. Competitive threats, regulatory issues, slow growth in coming years, and the need to acquire growth amidst a richly valued biotech market are all reasons Bezek cites in making the case that Gilead is not worth holding (and this was certainly a contrarian case - this is the 3rd short idea we've published on Gilead since last August, and also the 3rd since 2009; we've published 19 long ideas in the last two months). On the long side, he presented Taro Pharmaceuticals (NYSE:TARO), a generic company trading at the same 13x PE ratio. While Bezek explained that the majority owner was a well-known overhang on the stock, the company's consistent growth and sector tailwinds make it likely to be taken over, either by that majority owner or a bigger generics company (and that space has seen a great deal of consolidation). The biotech and pharmaceutical space is a sellers' market, Bezek implies, and with Taro likely to sell and Gilead likely to buy, the odds are in the former's favor, he feels.
Kevin Feeney looked at the uranium sector and made a clear-cut case for why to go with an industry leader and not a weaker competitor. Cameco Corporation's (NYSE:CCJ) stable and diversified model, Feeney writes, makes it a solid play if uranium prices continue to resist expectations (and perpetuate a pattern) and stay low. Cameco's industry dominance allows it to operate in tough conditions. Meanwhile, a uranium price move significant enough to bring Uranium Energy Corp (NYSEMKT:UEC) back to market would also bring lots of other competitors in, leading to increased supply and subsequently lower prices. With a high valuation and a shaky balance sheet, the company doesn't appear to have much flexibility to ride out the storm, nor to capitalize when prospects get rosier.
Congrats to our winners, and thanks to all of our entrants! This was a fun contest for us to review, and I hope readers enjoyed the focus on an alternative investment approach (rather than just long or short). For all authors who had articles published, the two weeks of SA PRO access you earned will be awarded in the coming days. Below I've listed some of the other articles that we considered closely for the top 3, in no specific order.
- J Mintzmyer - Long Star Bulk Shipping / Short Scorpio Bulkers - Read article »
- Darren McCammon - Long Blue Capital Reinsurance Holdings / Short HCI Group - Read article »
- SomaBull - Long Yamana Gold / Short Osisko Gold Royalties - Read article »
- Soldier of Fortune - Long Boulevard Acquisition Corp / Short Platform Specialty Products - Read article »
- Catharina Hillebrand-Saponar - Long GDF Suez / Short Electricite de France - Read article »
- Logribel Biostocks - Long Genfit / Short Intercept Pharmaceuticals - Read article »
- Brendan Rose - Long Silicom / Short Cavium Networks - Read article »
- Colorado Wealth Management Fund - Long Bimini Capital Management / Short Orchid Island Capital - Read article »
See our full list of published entries here.
Thanks again to all contributors for your participation and to readers for your comments and feedback, it is definitely what makes the site special! We're looking forward to announcing another contest in coming weeks, so please stay tuned.
If you have any suggestions or comments about the contest, or if you had other favorites in the contest, please feel free to leave a comment below or get in touch with me by direct message or email.