September 25, 2014
MRPT© mean reverting pair trading strategies
TOD IM: Eur 81.85; SFER IM: Eur22.32; BC IM: Eur 16.94; MONC IM: Eur 11.60; 1913 HK: HK$48.20; KER FP: Eur 160.50
The European luxury sector has had a very difficult time performance wise in the last 1-2 years with most stocks having peaked relative to the Eurostoxx in 2012-2013. Not one stock is in an uptrend, whether in relative or absolute terms. This is for a sector where analysts were universally bullish. We had been bearish on this sector on valuation grounds for quite some time, and with some of the strongest stocks clearly topping-out and in clear relative downtrends (Richemont, LVMH, Kering), our view is becoming well vindicated. In this environment, we regularly come-up with long/short ideas in what is generally an extremely mean reverting sector, playing on the over/under performance of companies against each others, mainly based on stock performances post earnings announcements. It seems that in the sector, earning estimates go one quarter to the next from being over estimated to under estimated. This has been a very profitable merry-go-round for the MRPT strategies. As of now, two stocks appear conspicuously undervalued in the Italian fashion sector: TOD’s and Prada. On the other hand, Ferragamo, Kering (Gucci), and especially Bruno Cucinelli appear overvalued. Cucinelli has already collapsed from its recent highs and we would wait for the stock to hopefully rally to re-recommend shorting the stock. Tod’s/LVMH and Prada/Kering, Prada/Ferragamo are three very mean reverting pair trades, justified by relative value and the recent price/value dislocation. Moreover, as we have argued before, we believe that in time, Tod’s will be acquired by LVMH given the close relationship between Diego Della Valle and Bernard Arnault. Mr. Della Valle is on LVMH’s board, while LVMH owns over 2% of Tod’s. As such, we are always buyers of Tod’s on significant underperformance within the sector, which is the case right now.
FULL REPORT ATTACHED
Trade action flash – Luxury merry-go-round continues: Italian fashion: Long Tod’s / Short LVMH; Long Prada / Short Kering, Ferragamo