CTRA - Twenty top stock pair trades from Raymond James

2023-04-06 07:47:11 ET

Raymond James updated its Pair Trade List of divergent stock recommendations after some underperformance in March.

The list of pairs was down -2.6% in March, compared to a +3.5% gain in the S&P 500 ( SP500 ) ( SPY ) ( IVV ) ( VOO ) and a +2.4% rise in the Russell 3000 ( IWV ).

The "banking crisis was broadly not kind to the list," analyst Tavis McCourt wrote in a note.

The list is up 28.6% since its inception in December 2020.

Pairs trades are a marketneutral strategy, buying a stock assessed to be undervalued and selling an overvalued stock short.

The Pairs Trade List:

1. Marsh & McClennan ( NYSE: MMC ), rating Outperform and Aon ( NYSE: AON ), rating Underperform - "Two large insurance brokers with similar valuations, but MMC sports a stronger organic growth rate and less international exposure, which should result in a premium valuation over time."
2. Wintrust Financial ( WTFC ), Strong Buy and Old National ( ONB ), Market Perform - "We are pairing WTFC, a Chicago bank with superior loan growth and discounted P/TBV valuation with ONB has a slower organic growth outlook and premium P/TBV valuation."
3. Huntington Bancshares ( HBAN ), Strong Buy and U.S. Bancorp ( USB ), Underperform - "HBAN has a discounted P/E and completed an acquisition in mid-2021, with cost synergies in front of it, while USB trades at a higher P/E and faces regulatory headwinds to its announced acquisition - this trade benefits from typical trading of banks around M&A."
4. Dave & Buster's ( PLAY ), Strong Buy and Shake Shack ( SHAK ), Market Perform - "PLAY is materially less expensive on current profitability with substantial growth prospects, and a revenue stream less exposed to a slowing economy, while SHAK is growing as well, but with more risk to fundamentals if the economy weakens."
5. Delta Air Lines ( DAL ), Strong Buy and American Airlines ( AAL ), Market Perform - "Delta sports a better balance sheet and discounted valuation on an EV/EBITDA basis relative to AAL, which should start to matter as growth rates normalize, and likely valuations normalize in the airline industry over the next 1-2 years."
6. Broadridge Financial ( BR ), Outperform and FactSet ( FDS ), Underperform - "Both are high quality fintech names with substantial recurring revenue and pricing power, but with similar organic growth outlooks, FDS is valued at a meaningful premium, and our capital markets analyst believes this valuation gap should narrow over time."
7. Federal Realty Investment Trust ( FRT ), Strong Buy and Kimco ( KIM ), Market Perform - "Two REITS with similar valuation multiples (P/FFO), but FRT should have substantially more growth over the next several years."
8. CVS ( CVS ), Outperform and Walgreens ( WBA ), Market Perform - "CVS should have a superior mix of business relative to WBA for the next several years and easier 2023 guidance to achieve and after recent sell off trades at a P/E premium that should be meaningfully higher based on analyst John Ransom’s opinion."
9. WESCO International ( WCC ), Strong Buy and Fastenal ( FAST ), Underperform - "WCC is an industrial distributor that is deleveraging and benefiting from inflation, while FAST is a much more expensive industrial distributor and growing more slowly, which should cause the valuation gap between the two to close over time."
10. CareTrust REIT ( CTRE ), Strong Buy and Sabra Health Care REIT, Market Perform - "Both are REITs in Skilled Nursing Facilities, CTRE has the potential for portfolio optimization and better growth outlook than SBRA."
11. Williams Companies ( WMB ), Strong Buy and Kinder Morgan ( KMI ), Market Perform - "Very similar EV/EBITDA valuation for these midstream players, but our midstream energy team believes WMB deserves a premium due to superior long term earnings growth prospects."
12. CACI International ( CACI ), Outperform and Booz Allen ( BAH ), Market Perform - "Both are relatively non-cyclical beneficiaries of defense related IT spending, BAH has traditionally and continues to trade at a meaningfully higher P/E multiple, but CACI is gaining share and should see its valuation improve as its growth rates moves closer to BAH’s over time."
13. Diamondback Energy ( FANG ), Strong Buy and Coterra Energy ( CTRA ) - "FANG’s higher oil exposure relative to natural gas than CTRA should benefit FANG results on a relative basis, while CTRA’s substantial valuation premium to FANG should shrink if the year progresses as analyst John Freeman predicts."
14. Jabil ( JBL ), Strong Buy and Flex ( FLEX ), Market Perform - "JBL has a discounted valuation with similar growth prospects than FLEX and improving revenue quality (sustainability) at JBL. The valuation gap should close."
15. Pure Storage ( PSTG ), Strong Buy and Nutanix ( NTNX ), Market Perform - "Similar revenue multiple for both share gainers in the storage industry, but PSTG has greater bottom line profitability and superior growth for at least the next year or so, warranting a premium valuation."
16. Landstar System ( LSTR ), Outperform and C.H. Robinson ( CHRW ), Underperform - "Both trucking companies, but based on trucking analyst, Felix Boeschen’s opinion, LSTR should have a superior business mix for the likely transport outlook over the next year, while CHRW’s P/E premium to LSTR should shrink from current levels."
17. Dollar General ( DG ), Strong Buy and Dollar Tree ( DLTR ), Market Perform - "Very similar P/Es but DG is a best in class operator, while DLTR remains in a multi-year turnaround; we expect stronger earnings growth and less operational risk at DG, leading to a valuation premium over time."
18. CubeSmart ( CUBE ), Strong Buy and Public Storage ( PSA ), Market Perform - "Two very similar self-storage REITs, CUBE trades at a lower multiple and better chance at external growth accretion than PSA given its size differential."
19. American Homes 4 Rent ( AMH ), Outperform and Mid-America Apartment Communities ( MAA ), Market Perform - "Two high quality companies in the residential REIT market. Analyst Buck Horne believes SFR REITs have a better outlook than multi-family apartment REITs, especially in the Sun Belt due to a large supply increase in apartments in the next two years. We believe this should lead to outperformance of AMH vs. MAA."
20. Fidelity National Information Services ( FIS ), Strong Buy and Jack Henry ( JKHY ), Market Perform - "FIS is trading at a meaningful discount to its historical multiple and JKHY, while JKHY’s less volatile business should allow it to maintain a valuation premium to FIS, this should close as FIS fundamentals recover."

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