Paired Trade: Buy Shoe Carnival, Sell Collective Brands

This is the 6th in a series of articles that attempt to identify relative value discrepancies between two closely related securities. So far, the first five (but not the most recent one - ouch!) have been modestly successful in aggregate, though it's a little early to be drawing conclusions:

		BUY	SELL
		MPR	NLC
13-Mar		7.30	11.99
22-Jun		10.21	16.00
		39.9%	33.4%	3.2%
		JNJ	AGN
17-Apr		53.05	49.49
22-Jun		56.09	46.48
		5.7%	-6.1%	5.9%
		COLM	UA
1-May		30.36	24.00
22-Jun		32.17	22.05
		6.0%	-8.1%	7.0%
		BCR	ISRG
8-May		73.52	158.77
22-Jun		74.35	161.15
		1.1%	1.5%	-0.2%
		EZPW	AAN
5-Jun		13.09	32.85
22-Jun		10.88	30.99
		-16.9%	-5.7%	-5.6%

For reference:

3/14: Buy Met-Pro (MPR), Sell Nalco Holding (NLC)

4/18: Buy Johnson & Johnson (JNJ), Sell Allergan (AGN)

5/3: Buy Columbia Sportswear (COLM), Sell UnderArmour (UA)

5/10:  Buy C.R. Bard (BCR), Sell Intuitive Surgical (ISRG)

6/6: Buy EZCORP (EZPW), Sell Aaron's Rents (RNT)

Today's idea is driven primarily by the sell, Collective Brands (PSS), which I find to be very expensive relative to a host of competitors.  I have written about Shoe Carnival (SCVL) in the past on several occasions, including late 2007, August 2008 and as part of a review of the first year of my Top 20 Model Portfolio (of which it is still a member).  I follow the shoe and shoe-related companies fairly closely and could select any number of other companies against PSS.  As you can see in the table below, it has one of the worst balance sheets but a fairly high valuation:

While I highlighted TBL and DSW as well, I chose SCVL as the other side as it remains so inexpensive. In addition to a pristine balance sheet and high inside ownership, this retailer had a great report recently, reducing absolute inventory and per-store again. The company isn't too exciting - focused singularly on selling shoes to women, men and children in low-income markets in the Southeast. Here's the comparison:

Don't be fooled by the low PE - PSS has a lot of debt and EV/EBITDA is a more appropriate metric.  Historically, the vertically integrated PSS (which admittedly has more moving parts) hasn't really had better margins than SCVL, but note that the EV/Sales ratio is more than double that of SCVL.  PSS is scaling back, while SCVL, with its strong balance sheet, is taking advantage of great real estate conditions to grow selectively.  With the economic headwinds likely to be protracted, it makes little sense to pay up to own PSS when SCVL and so many other similar companies are as cheap if not cheaper with less financial risk.

Disclosure:  Long SCVL

Comments

[christian louboutin]

Just one question: how to add your blog into my rrs reader, thanks so much.

[Alan Brochstein]