Stocks pairs trading: TGT vs GPS

BATS:GPS   Gap, Inc. (The)
I'm delving into a pairs trading strategy featuring two powerhouses in the retail industry: Target Corporation (TGT) and Gap Inc. (GPS). Both companies are well-recognized and have an extensive product range, but there are key differences that open up a trading opportunity. I'm considering going long on Target and short on Gap, aiming to capitalize on their reversion to a historical relationship.

Why Go Long on Target Corporation (TGT):

Valuation: Target has a lower P/E ratio of 15.17 compared to Gap's 36.54, making Target comparatively less expensive.

Dividend Yield: Target offers a dividend yield of 3.63%, which while lower than Gap's 5.57%, comes with stronger fundamentals like higher ROA and ROE.

Profitability: Target’s ROA and ROE are 6.38% and 29.87% respectively, much higher than Gap’s ROA of 0.94% and ROE of 4.73%.

Performance Metrics: Despite Target's negative performance over the last year, its stronger fundamentals could make it a strong candidate for a rebound.

Why Short Gap Inc. (GPS):

Valuation: Gap's P/E ratio of 36.54 suggests that it might be overvalued compared to Target.

Short Interest: Gap has a high short float of 18.32%, which could mean it is more vulnerable to negative market sentiment, making it a candidate for a short position.

Profitability: Gap’s lower ROA and ROE figures as compared to Target suggest less efficiency and profitability, reinforcing the decision to short the stock.

Performance Metrics: Despite positive performance in the short term, Gap's weaker fundamentals compared to Target make it less appealing for a long-term position.


Long on 1 TGT
Short on 10 GPS

The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.