Stocks pairs trading: GM vs FI'm diving into a pairs trading strategy featuring two titans in the automotive industry: General Motors (GM) and Ford (F). Both companies are household names with a rich history in the automotive sector, but their financial metrics reveal key differences that present a trading opportunity. I'm contemplating going long on General Motors and short on Ford, aiming to capitalize on their distinct financial landscapes.
Why Go Long on General Motors (GM):
Valuation : GM has a P/E ratio of 4.34, significantly lower than Ford's P/E ratio of 11.84. This makes GM comparatively less expensive and potentially undervalued.
Dividend Yield : GM offers a dividend yield of 1.43%, which, while lower than Ford's 4.60%, comes with stronger fundamentals such as higher ROA and ROE.
Profitability : GM's ROA and ROE stand at 3.88% and 15.14% respectively, much higher than Ford's ROA of 1.62% and ROE of 9.42%.
Performance Metrics : Despite negative performance across multiple timeframes, GM's stronger fundamentals could position it well for a rebound in the longer term.
Why Short Ford (F):
Valuation : Ford's higher P/E ratio of 11.84 suggests that it might be more expensive relative to its earnings than GM, potentially making it overvalued.
Short Interest : Ford has a higher short float of 3.67%, implying it could be more susceptible to negative market sentiment, thereby making it a candidate for a short position.
Profitability : Ford's lower ROA and ROE figures compared to GM indicate less efficiency and profitability, supporting the decision to go short on the stock.
Performance Metrics : Despite Ford's positive performance YTD, its weaker financial fundamentals compared to GM make it a riskier long-term investment.
Decision:
Long on 1 GM
Short on 3 F