Looking for suggestions on *relative* over/under valuations in subsectors to construct portfolio of offsetting positions which are "subsector neutral". That is, the performance of the positions is only dependent on the change in relative valuations of the stocks, not the absolute value changes.
For example, consider the "antibody" subsector and the portfolio position consisting of (prices approximate):
-100s Abgenix (ABGX)@ 138 (short)
+200s Medarex (MEDX)@ 50
+100s Cambridge Antibody (CHBMF)@30
The portfolio has offsetting positions. Value increases as the *relative* valuation of MEDX/CHBMF(+) and ABGX(-) change. If all move together, either up or down, then the portfolio value is unchanged, and thus (theoretically)immune to "subsector rotation".
Note that the valuation gap has to decrease at a rate faster than the carrying cost to make profit. Of course, if the gap widens one loses.
The challenge is to come up with "best" and "worst" of breeds such that the valuation gap is wide enough to be expected to be *narrowed* in some reasonable time, not necessarily closed all the way. Note that while ideally each stock's line of business is matched by another this is not possible in all cases. So it is important, as always, to have diversification.
An example of what could have been done(not done by me, this is hindsight) is when MZ called for short 1 GERN at 60, at the same time go long 5 CTII at 12 (not part of MZ's call). This then becomes a relatively independent of stem cell subsector changes overall and more directly a play on the relative valuations of GERN and CTII. If unwound when GERN went to 40 while CTII dropped to 9 the portfolio would have had a profit of $5. Were these positions still open as of yesterday's close: GERN was down about 54% to 27 3/4. CTII was down to 5 1/2 the day before yesterday, making the position breakeven. Yesterday CTII closed up to 7 23/32 giving the position a profit of about 10 3/4. Not as profitable as "calling the short", or "calling the top", but for us "short chickens" not as risky.
(My primary motivation for the approach is to gingerly begin to have short positions without losing too much sleep.)
(Not to put words in MZ's mouth, but we're getting closer to CLTX at 46 again).
So, to sum up I'm looking for a great deal of help in choosing some stocks grouped in subsectors with a (wider the better) gap in *relative valuation*.
If there is interest in this investment approach I will assemble the collected wisdom into an "over/under" portfolio.
mfm
For something completely different: Given the high volatility, option premiums have increased. One other thing running through my mind is selling puts on the big cash cos. If they finish in the money I'm buying at a further discount to today's prices. But this is an absolute valuation play and only applicable to faves. |
