http://www.thestar.com/business/article/835823–olive-a-rim-rebirth-in-the-offing
I read the Toronto Star simple because it is the only paper delivered in the country. It can be quite good at times as in this morning’s article by David Olive in which he anticipates the rebirth of Rim and,at the same time, a backlash against Apple. The article can be found on the internet under the above address.
In a pairs trade you go long A and short B with an overall position that is “market neutral”. A typical application of this concept , that was popular a few years ago , was to buy corporate bonds and sell short government bonds as a hedge. Often you lost on both sides as spreads widened and govies gravitated to zero. Not what you want, clearly it is important that the two entities A and B have enough attributes in common to make them pairs without being identical as then it would, by definition, not work. I year or so ago I had a comparable trade long CM and short RY that worked quite well. Both are, of course banks, but CM is groping in the dark whereas RY is arrogantly focused and as a consequence CM was lagging behind.
RIM and AAPLE more or less fit the picture sufficiently well to give it a shot. RIM trades at a P/E of about 12 at a price of $56 and APPL at a P/E of 22 at a price of $253. For the sake of simplicity we will overlook the fact that one trades in C$ and the other in US$ (which could be remedied by using RIMM instead) To be market neutral you need to buy 4.5X as much RIM as you sell AAPL (253/56)- you buy 4.5 shares of RIM and sell 1 share of AAPL. Technically you have no money in the game as the sell pays for the purchase (this does not work in retail!). From this point on you do not care where the market goes but you do want the two to converge. Will they? Here are the charts once again (using RIMM).
Both charts have identical time frames and both are in US$. You can click on them to enlarge and you can move them around to get a better feel. From an EW point of view, AAPL looks like a completed 5 wave up move whereas with RIMM it is more ambiguous as the top in the chart may only be the 3d wave implying that new highs lie ahead. In any case it is clear that RIMM is at the bottom of its range and AAPL at the top (buy low , sell high ). To put it another way, AAPL has a much higher degree of freedom to move up. Also one could , of course argue that the stocks are not sufficiently comparable to be considered a pairs trade. No problem provided one agrees with both stories but just do not call it a pairs trade. See also my earlier comments on RIM and AAPL .
To Finnish this subject , one might want to look at Nokia NOK, not sufficiently comparable but possible a buy in it’s own right. The chart be low is log-scaled to emphasize the a-b-c correction that the stock has suffered over the last 10 or so years
