An Apple/Amazon Pairs Trade Idea

03/22/2012 4:45 pm EST

Focus: STOCKS

Boris Schlossberg

Managing Director of FX Strategy and Co-Founder of BKForex LLC, BK Asset Management

While Apple’s age of prosperity continues and Amazon.com continues to struggle, Boris Schlossberg suggests an interesting pairs trade that would profit as the competitive gap between the two tech giants widens this year.

We’re talking today with Boris Schlossberg about two very popular trading stocks, Amazon and Apple, and his thoughts about how to make some money here. So, Boris, talk about Amazon and Apple. What do you think is the best play here?

Well, I think it’s a very interesting story here because the biggest fundamental driver in equities in general has been this move towards dividend-bearing stocks.

We’re now, of course, in an environment where we’re at a zero interest rate for savers for as far as the eye can see. The Fed has basically telegraphed to the world that they’re never going to raise rates through my lifetime; I think is pretty much how Chairman Bernanke put it!

So, under those conditions, savers are very much punished. There is no place for them in fixed income where they can put their money and get any kind of reasonable return. That’s why they’ve been flocking to dividend-yielding stocks.

Now, Apple (AAPL) is incredibly fascinating because although it’s had a meteoric rise over the last several months, and certainly over the last few years, it is a cash cow. It is a monster cash-generating machine, and most people feel that Apple is going to sooner rather than later declare a dividend, which, in my opinion, is obviously going to enhance the value of the stock.

That’s going to now make it into a yield-bearing stock, and furthermore, if they continue just to simply maintain that kind of growth pattern as they go forward, they’re going to generate even more cash, most of which they’re going to begin to return to shareholders, so I think AAPL becomes a very interesting play.

On the other hand, Amazon.com (AMZN), even though it is an incredibly large stock, it has a huge amount of revenue, and you can sort of view it as the Walmart (WMT) of the Web, it has really suffered tremendously when you look at its fundamentals.

Its margins are razor thin. It is in a business that is very difficult to maintain, which is CDs, books, and some of the physicals that are just very low-margin businesses for them. I think all of that is really bearing down on them as we go forward.

There is certainly no chance that Amazon is going to declare a dividend anytime soon, but more importantly, I think Amazon, because of its high valuation and its cash crunch, could actually become very vulnerable to a selloff as we go into the year.

In my opinion, I think an interesting pair trade is to go long Apple and short Amazon for the spread, and as the year progresses, I think that spread is going to only widen.

Now, Amazon has come out with Kindle Fire, and of course, they’re trying to make more of the Apple-like tablet and electronic books that are higher margin. Do you think that will help?

It would help if they would execute that product well, but unfortunately, as you have seen, the Kindle Fire has been a pretty big disappointment to many people.

One of the interesting things that Amazon has not disclosed is the return rate on the Kindle Fire, which many people believe is maybe even in the double digits.

Furthermore, the Kindle Fire is a money-losing proposition for them on a hardware basis. They actually lose money on every single Kindle Fire that they put out, and they’re trying to make money on the back end by all of the content.

Apple, of course, makes money on every piece of their chain. They make money on the hardware, they make money on the software, and they make a lot of money on all of those components.

In many ways, it’s just simply a better execution of the model. Given a choice, if you had a choice between a Kindle Fire and an Apple iPad, and no constraint on money, it’s not even a question. Everybody is going to be buying an Apple iPad.

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