In times of uncertain economic conditions and highly-volatile markets, pair trades can be one easy way to reduce trading risk. Pairs trades involve shorting one stock and going long another, typically correlated one. Industry experts at last week’s Sohn Investment Conference laid the foundation for pair trades involving Amazon.com (AMZN), General Motors (GM) and Royal Dutch Shell (RDS.A).
Trade 1 : Long Amazon.com (AMZN)/Short Alibaba (BABA)
At the Sohn Conference, Social Capital’s Chamath Palihapitiya praised AMZN’s infrastructure, which he believes sets the company apart from tech giants Facebook (FB) and Twitter (TWTR). He also believes that AMZN’s retail customer base could more than double simply by growing 10% per year over the next 10 years.
Ultimately, Palihapitiya sees AMZN as a $3 trillion business by 2025.
On the other hand Kynikos’ Jim Chanos told CNBC at Sohn that he is still short Chinese e-commerce giant BABA. Chanos called China “the gift that keeps on giving on the short side.”
Chanos pitched his own Chinese e-commerce pair trade at a conference back in November, saying that he was going short BABA and long Chinese rival JD.com (JD). Since Chanos shared his original idea, BABA’s stock is down 4.6% and JD’s stock is down 22.3%.
Trade 2: Long General Motors (GM)/Short Tesla (TSLA)
Greenlight Capital’s David Einhorn was singing the praises of GM at the Sohn Conference. According to Einhorn, auto investors shouldn’t fear peaking auto sales numbers. Einhorn sees plenty of sales growth opportunity for GM in China and believes that GM is well-positioned to grow higher-margin European sales in the next couple of years as well.
GM currently pays a generous 4.9% dividend and has plenty of cash to maintain that payout in the future. Finally, the stock currently trades at a minuscule 5.4x 2016 earnings estimates.
TSLA, on the other hand, is another one of Chanos’ favorite shorts. At Sohn, he said that TSLA “will definitely need to raise capital.” He also questioned the reliability of TSLA’s ambitious production ramping goals. Chanos pointed out that TSLA has difficulty accurately predicting production numbers a single quarter ahead, must less several years in advance.
He also noted that the timing of the recent departures of two senior executives should be a “red flag” for investors.
Trade 3: Long Royal Dutch Shell (RDS.A)/Short SolarCity (SCTY)
Nick Tiller of Pecocity Capital believes that RDS.A is the best way for investors to play a recovery in the oil market. In fact, Tiller believes that RDS.A shares should be trading above $100. (FYI, that’s double its current price).
At Sohn, Tiller pointed out that, despite the rise of alternative energy, oil has plenty of gas in the tank, so to speak. In fact, Tiller noted that coal’s market share of global energy production peaked in 1920, but the industry thrived for decades after that.
The short side of the energy pair trade comes once again from Chanos, who is short SCTY. Chanos argues that SCTY is losing money on every solar installation it performs and is already in “financial trouble.” Chanos sees SCTY as a subprime financing company that grew solar installations by 73% last year and still generated -$790 million in cash flow from operations. He believes SCTY’s poor financial situation will only deteriorate further in the future.
Disclosure: as of this writing, Wayne Duggan was long BABA.
