{"id":109172,"date":"2017-07-17T09:45:03","date_gmt":"2017-07-17T13:45:03","guid":{"rendered":"http:\/\/countingpips.com\/?p=109172"},"modified":"2017-07-17T06:14:40","modified_gmt":"2017-07-17T10:14:40","slug":"two-small-stocks-one-giant-mystery","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2017\/07\/two-small-stocks-one-giant-mystery\/","title":{"rendered":"Two Small Stocks, One Giant Mystery"},"content":{"rendered":"<div id=\"inves-1158220456\" class=\"inves-below-title-posts inves-entity-placement\"><div id =\"posts_date_custom\"><div align=\"left\">July 17, 2017<\/div><hr style=\"border: none; border-bottom: 3px solid black;\">\r\n<\/div><\/div><p>By <a href=\"http:\/\/WallStreetDaily.com\/\"><u>WallStreetDaily.com<\/u><\/a> <img loading=\"lazy\" decoding=\"async\" class=\"attachment-home-th size-home-th wp-post-image\" style=\"display: block; margin-bottom: 5px; clear: both;\" src=\"https:\/\/s3.amazonaws.com\/wallstreetdailywebsite\/wp-content\/uploads\/2017\/07\/0717_pairstrading_feature.jpg\" sizes=\"auto, (max-width: 580px) 100vw, 580px\" srcset=\"https:\/\/s3.amazonaws.com\/wallstreetdailywebsite\/wp-content\/uploads\/2017\/07\/0717_pairstrading_feature.jpg 580w, https:\/\/s3.amazonaws.com\/wallstreetdailywebsite\/wp-content\/uploads\/2017\/07\/0717_pairstrading_feature-300x155.jpg 300w\" alt=\"Two Small Stocks, One Giant Mystery\" width=\"580\" height=\"300\" \/><\/p>\n<ul>\n<li>Weight Watchers is bulking up.<\/li>\n<li>Vitamin Shoppe needs a vitamin blast.<\/li>\n<li>Divergences can be profitable.<\/li>\n<li><a href=\"https:\/\/pro.agorafinancial.com\/m\/713304\" target=\"_blank\" rel=\"noopener\"><strong>Also recommended: Takeover warning issued on 5 stocks.<\/strong><\/a><\/li>\n<\/ul>\n<hr \/>\n<p><img decoding=\"async\" style=\"float: left; max-width: 85px;\" src=\"https:\/\/duip7hn7nchpo.cloudfront.net\/editor-circle-louis-basenese.jpg\" alt=\"Louis Basenese\" \/>I\u2019ve got a bit of a strange anomaly to report.<\/p>\n<p>Weight Watchers Intl. (NYSE: WTW) is enjoying a banner year.<\/p>\n<p>Shares are up 211% year to date.<\/p>\n<p>Subscribership is up a whopping 16% in the latest quarter, to 3.6 million.<\/p>\n<p>The result of such vertical growth has swung EPS from a loss of $0.18 to a profit of $0.20.<\/p><div id=\"inves-582215209\" class=\"inves-in-content inves-entity-placement\"><hr style=\"border: 1px solid #ddd;\">\r\n<div id=\"inpost_ads_header\">\r\n<p style=\"font-size:10px; float:left; color:#666;\">Free Reports:<\/p><\/div>\r\n<div id=\"inpost_ads\"> \r\n<p style=\"font-size:15px; float:left;\"><a href=\"https:\/\/goo.gl\/1ApBOV\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/investmacro.com\/wp-content\/uploads\/2018\/06\/graph_techs_PD.png\" align=\"left\" width=\"80\"  height=\"55\"\/><\/a>\r\n\t     <a href=\"https:\/\/goo.gl\/1ApBOV\"><b><u>Get Our Free Metatrader 4 Indicators<\/u><\/b><\/a> - Put Our Free MetaTrader 4 Custom Indicators on your charts when you join our Weekly Newsletter<\/p><br><br>\r\n<br>\r\n<br>\r\n<p style=\"font-size:15px; float:left;\"><a href=\"https:\/\/goo.gl\/f3RrHX\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/investmacro.com\/wp-content\/uploads\/2019\/01\/cot_pie_80.png\" align=\"left\" width=\"80\"  height=\"55\"\/><\/a>\r\n\t    <a href=\"https:\/\/goo.gl\/f3RrHX\"><b><u>Get our Weekly Commitment of Traders Reports<\/u><\/b><\/a> - See where the biggest traders (Hedge Funds and Commercial Hedgers) are positioned in the futures markets on a weekly basis.<\/p><br><br>\r\n<\/div>\r\n<hr style=\"border: 1px solid #ddd;\">\r\n<br><\/div>\n<p>Management just raised earnings guidance for the rest of the year, too.<\/p>\n<p>OK. So we have a company thriving in the \u201chealthy lifestyle\u201d niche of the market.<\/p>\n<p>Meanwhile\u2026<\/p>\n<p>Vitamin Shoppe Inc. (NYSE: VSI) is getting its butt kicked.<\/p>\n<p>Shares are in free fall \u2014 down 54% so far this year.<\/p>\n<p>Margins have plummeted to 28%.<\/p>\n<p>Cash flow is dwindling to worrisome levels. And as malls get less and less traffic, the company\u2019s customer base is disappearing.<\/p>\n<p>Wait, what? Isn\u2019t Vitamin Shoppe in the same \u201chealthy lifestyle\u201d niche as Weight Watchers International?<\/p>\n<p>In the biz, we call such a phenomenon a \u201cdivergence.\u201d<\/p>\n<p>Divergences can be profitably traded by using a pairs trading strategy.<\/p>\n<p>The idea behind pairs trading suggests that Weight Watchers International and Vitamin Shoppe should trade in a reasonably similar pattern. That is, since they exist within the same niche.<\/p>\n<p>Small fortunes supposedly await those who play the imbalance between the two stocks.<\/p>\n<p>But does pairs trading truly work?<\/p>\n<p>I asked my senior analyst, Martin Hutchinson, to take a peek under the hood.<a name=\"video\"><\/a><\/p>\n<p>His full report on pairs trading is below.<\/p>\n<p>Ahead of the tape,<\/p>\n<p>Louis Basenese<br \/>\nChief Investment Strategist, <em>Wall Street Daily<\/em><\/p>\n<hr \/>\n<p><script src=\"https:\/\/fast.wistia.com\/assets\/external\/E-v1.js\" async><\/script><\/p>\n<div class=\"wistia_responsive_padding\" style=\"padding: 57.0% 0 0 0; position: relative;\">\n<div class=\"wistia_responsive_wrapper\" style=\"height: 100%; left: 0; position: absolute; top: 0; width: 100%;\">\n<div class=\"wistia_embed wistia_async_ai6h3cl30j videoFoam=true\" style=\"height: 100%; width: 100%;\"><\/div>\n<\/div>\n<\/div>\n<hr \/>\n<p>Pairs trading is a market-neutral strategy that matches a long position in one stock with a short position in another closely related stock.<\/p>\n<p>If two stocks are highly correlated and then you look when one of them has been much weaker and you buy that and you sell the stronger one under the assumption that they\u2019ll move back together.<\/p>\n<p>High correlation is calculated by something called the correlation coefficient, which goes between minus one and plus one, and pairs traders usually look for correlations of 0.8 or more.<\/p>\n<p>The idea behind pairs trading is that this eliminates market risk and industry risk, because you\u2019re short one stock and long another stock that\u2019s similar. And that reduces this to an arbitrage between the two stocks.<\/p>\n<p>It\u2019s one of a collection of arbitrage strategies. It was one of the first quantitative techniques developed by investment bankers in the 1980s.<\/p>\n<p>Inevitably, however, as the number of hedge funds has increased, the profitability of pairs trading, like other quant techniques, has declined.<\/p>\n<p>Morgan Stanley made $50 million from this in 1987 but then lost it all back again in the next two years and disbanded the pairs trading group. So much for that.<\/p>\n<p>Today, obviously, the individual investor has the data and the technology to be able to do this, and you could look for events that trigger a weakness in the correlation to cause one stock to drop.<\/p>\n<p>For example, big insider sales, mergers, information about a new product, legal or regulatory issues or a big accident or disaster affecting a product. Those would make one stock go either down or up against another closely related one.<\/p>\n<p>The problem is that pairs trading assumes that the correlation will re-establish itself.<\/p>\n<p>In the real world, highly correlated stocks often diverge.<\/p>\n<p>One may be better managed, one may have a reputational problem, one may have a product that goes obsolete or one may suffer a revolution in one of its major operating centers so it has to shut that operation down. There are all sorts of reasons why closely correlated stocks can diverge.<\/p>\n<p>My conclusion is that this is not a very smart strategy for individual investors.<\/p>\n<p>In particular, the correlations may be random due to data mining, which is where you compare 5,000 stocks over the last 30 years. There are bound to be some correlations that don\u2019t mean anything at all. In that case, they\u2019re bound to diverge again if they\u2019re random.<\/p>\n<p>It\u2019s an area in which the individual investor has a real disadvantage, and even the professional investors like hedge funds don\u2019t do too great, either.<\/p>\n<p>This is Martin Hutchinson signing off. Thank you.<\/p>\n<p>Smart investing,<\/p>\n<p>Martin Hutchinson<br \/>\nSenior Analyst, <i>Wall Street Daily<\/i><\/p>\n<p>The post <a href=\"https:\/\/www.wallstreetdaily.com\/2017\/07\/17\/two-small-stocks-one-giant-mystery\/\" rel=\"nofollow\">Two Small Stocks, One Giant Mystery<\/a> appeared first on <a href=\"https:\/\/www.wallstreetdaily.com\" rel=\"nofollow\">Wall Street Daily<\/a>.<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>By WallStreetDaily.com Weight Watchers is bulking up. Vitamin Shoppe needs a vitamin blast. Divergences can be profitable. Also recommended: Takeover warning issued on 5 stocks. I\u2019ve got a bit of a strange anomaly to report. Weight Watchers Intl. (NYSE: WTW) is enjoying a banner year. Shares are up 211% year to date. Subscribership is up [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-109172","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/109172","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=109172"}],"version-history":[{"count":3,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/109172\/revisions"}],"predecessor-version":[{"id":109175,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/109172\/revisions\/109175"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=109172"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=109172"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=109172"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}