Larry, (Off topic) Re: Paired Trades. Todays Barrons had an interview with a hedge fund manager who describes in detail, the logic behind several paired trades. Here's part of the interview:
Q: Tell us about a paired trade.
Collery: These names will be very familiar to your readers: We're long Quick & Reilly and short Charles Schwab. There's an element of humility in talking about this, because we're losing money on this paired trade, so far. But I'll tell you why it made sense when we did it, what's happened since and why it makes even more sense now. We got involved in early 1997, when we looked at the two companies and saw very comparable businesses, although obviously Schwab is much larger than Quick & Reilly. And similar business mixes, except that Schwab realizes about 20% of revenues from mutual-fund sales -- Schwab has grown more rapidly in recent years, largely as a result of growth in fund business. But in January, based on estimated '97 earnings, Schwab was trading at 21.3 times earnings and at an eye-popping 7.6 times tangible book value. Meanwhile, Quick & Reilly was trading at 9.2 times earnings and 2.6 times book. What's more, Q& R, which had conservatively waited for industry standards on trading and settling mutual-fund transactions to be developed, was on the brink of rolling out that business as well. Yet on a price-to-book basis, we were talking a three-times disparity in value. On a P/E basis, a well over two times disparity. We also noted -- because your
biggest nightmare when you are short is a takeout of that stock -- that we couldn't find an acquisition of a brokerage firm for more than 5 1/2 times tangible book, and Schwab was trading at a 50% premium to that. |
