Pairs trading is a market-neutral trading strategy that aims to capitalize on the relationship between two highly correlated stocks. When using this strategy, we would typically go long on the stock we expect to perform better and short the one we expect to perform worse, with the aim that the spread between the two will converge or diverge based on historical norms.
Stock "KSS"
Stock "M"
Strategy
Go Long on 2*"M": The stock has a low P/E ratio, positive earnings, and high ROA/ROE. Its extreme oversold status according to RSI could indicate a potential for upside.
Go Short on 1*"KSS": The stock has negative earnings, and a high short interest ratio. ROA and ROE are both negative, which suggests poor financial performance. The stock also has a high volatility (Beta = 1.80) which could work to our advantage when shorting.
Stock "KSS"
- P/E and Forward P/E: Not available and 8.16 respectively, indicating some expectation of future earnings.
- EPS: -1.06 (ttm), which suggests the company is not currently profitable.
- Market Cap: $2.93 Billion
- ROA/ROE: Negative
- Short Interest: High at 18.07%, indicating that a significant portion of investors are betting against it.
- Performance: Negative across multiple periods but positive for the quarter.
- RSI: 40.42, indicating neither overbought nor oversold.
Stock "M"
- P/E and Forward P/E: Very low at 4.69 and 4.29, which could imply undervaluation or higher risk.
- EPS: Positive at 2.59 (ttm), the company is profitable.
- Market Cap: $3.39 Billion
- ROA/ROE: Positive and relatively high.
- Short Interest: Lower than "KSS" at 8.59%.
- Performance: Negative across multiple periods.
- RSI: Extremely oversold at 16.86, which sometimes indicates a pending reversal.
Strategy
Go Long on 2*"M": The stock has a low P/E ratio, positive earnings, and high ROA/ROE. Its extreme oversold status according to RSI could indicate a potential for upside.
Go Short on 1*"KSS": The stock has negative earnings, and a high short interest ratio. ROA and ROE are both negative, which suggests poor financial performance. The stock also has a high volatility (Beta = 1.80) which could work to our advantage when shorting.