Boart Longyear and Mermaid Marine are in similar industries – both provide services to the mining industry. Both have just gone ex-dividend, but that’s where the similarities end. In trading over the last nine months, a huge valuation and share price gap has opened. While company specific factors have driven this divergence, the severity may have traders looking for a “pairs” opportunity.
What’s meant by a huge share price gap? Here’s the picture:
Boart Longyear vs Mermaid Marine – Daily
An almost 90% difference in performance over the period.
At current prices, the sea driller is trading on a 15 x Price to Earnings ratio – the land based BLY is on around 9 x. This is curious in light of long term growth expectations – MRM consensus is around 10%, BLY above 15%.
A potential key driver of this trade is a turnaround at BLY. A new CEO and Chair of the board have “cleared the decks”, taking write downs in H2 2012 against the redundancy of 2,000 staff, and restructuring the operations. Mermaid is a quality operation, and the rationale for this pairs trade (long BLY, short MRM) is NOT a negative view of MRM.
Rather, the advantage this offers traders is the offset of long and short. Not only does this trade have a lower risk from sudden broad market shifts, being long and short within minig services may also offset any major shifts in sentiment around the mining industry, commodity prices and global demand.
One possible approach is “value neutral”, matching the dollar value of the long BLY position to the dollar value of the short MRM position. As an example:
Trading in this fashion also requires monitoring of stop losses. Some traders will think of the stop loss for the total trade, combining the two positions profit/loss, and adjusting the individual stock stop losses accordingly.