In a new report, Morgan Stanley analysts discuss two pair trades they recommend in the branded footwear and apparel space. Analysts have only a “modestly bullish” overall view of the space, but they see opportunity for investors via some creative trading.
What Are Pair Trades?
Rather than picking a single stock or group of stocks and betting their share prices will rise (or fall) by going long (or short), a pair trade is constructed by picking a pair of stocks and making a long bet on one of them and an equal-sized short bet on the other.
The idea behind pair trades is that the trader will profit on the relative outperformance of the long stock over the short stock, regardless of how the sector or market performs overall.
Related Link: Citigroup’s Possible Pair Trade For Software Stocks
Mixed Bag For Footwear Companies
According to the report, U.S. consumers have never had more money to spend than they do right now. Spending capacity, measured by both U.S. household net worth and U.S. personal consumption expenditures is at an all-time high.
However, the willingness of consumers to let go of their hard-earned money is questionable.
A graph of U.S. personal saving as a percentage of disposable income shows that savings rates remain below long-term historical average, but that rates have been on the rise lately.
According to a survey included in the report, Americans also report a growing willingness to save.
The Trades
In light of the uncertainty in the footwear space, Morgan Stanley recommends the following two pair trades:
1. Long Nike Inc NKE 0.6%/Short DSW Inc DSW 0.69%
2. Long Sketchers USA Inc SKX 2.94%/Short Steven Madden Ltd SHOO 0.85%
Morgan Stanley has an Overweight rating on Nike and Sketchers, an Equal-weight rating on Steve Madden and an Underweight rating on DSW.
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