My pairs trade on the future of tech

Google logo © Getty images
Can Google become the world’s largest company?

It’s fair to say that I’ve been pretty much bowled over by Google – and I’ve certainly made the point over recent times. Having never been much of a techno-fiend, I’ve been very impressed by today’s sophisticated user-friendly technology and all the cloud-based services that bring the wonders of the web alive.

And I’ve been equally vocal about the guys in the industry that don’t seem to be keeping up. Most recently I made the point that Apple can no longer be considered a customer-friendly business at the forefront of this technological revolution.

But we are investors – so how do we make money out of all of this change? Well, today I’m going to show you one way. And if I do say so myself, it’s elegant in its simplicity: short Apple, long Google.

Two rivals: five years of battle

Apple v Google share price chart

Source: Digital Look

You hardly need me to point out that Apple has been a fantastic business – the blue line on the graph marks its success. This is a company that set the rules for what a PC should be, that went on to revolutionise not just the way we listen to music, but also the way the industry itself makes its money. From there Apple showed the world how a mobile phone should work, and then, of course, the tablet too.

On a five-year view, Apple is up 550%, and that’s despite the recent tail-off.

Of course, Google is no slouch. Over the same period, its shares are up around 350%.


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Apple just can’t keep up with Google

So, what’s the issue here? Well, the thing is, Apple’s fantastic growth is starting to taper off. Forecasters are pencilling in more pedestrian growth of about 8% over the next couple of years.

Yet, at the same time forecasters are looking at 35% growth for Google this year. As for the years after that, the guys in the suits are suggesting something like 20%. To my mind, these forecasts may even be a little conservative. Over the long run, there’s certainly room for upside revisions.

And the outlook has certainly come across in the stock performance. Like the first chart, the one below also plots Apple versus Google. Only this time, I’m just looking at the last couple of years. And on that timescale, suddenly the picture looks very different indeed. In fact, Google is all over Apple.

The two year view: Google leaves Apple in the dust

Apple v Google share price chart

Source: Digital Look

Let’s not forget that despite its recent underperformance, Apple is still the biggest company in the world. It’s worth nearly half a trillion dollars.

But hang on a second. Last week, Google itself overtook Exxon, thereby becoming the second largest company in the world. Google’s valuation is now $400bn.

And to my mind, there’s no reason why Google won’t be able to snatch the crown from Apple’s head pretty soon.

Back Google with this simple trade

When you’ve got two stocks, operating in the same space where you believe their prospects look very different, you’ve got the opportunity for an interesting trade.

Selling the underachiever short – while going long the stronger candidate – offers us a useful hedge.

What you’ve got in that trade is what’s often called a ‘market neutral’ trade. That is, the outcome of your trade isn’t dependent on the performance of the markets.

Should markets crash, the short position should profit as your long position loses ground. This is known as a ‘pairs trade’ and it allows you to take a position based on the relative performance of these two stocks.

Right now, you can buy Google in the market at $1,202.44. If you buy two shares – you’ll be long $2,404.88.

Apple is currently selling for $544.74. If you sold four shares, you’d be net short $2,178.96. That’s near enough hedged.

For most private investors, the trade is probably best placed using a spread bet, or contract for difference (CFD). Definitely do take into consideration all the risk factors, not least of which is the fact that using these tools allows you to apply considerable leverage.

What that means is that you could be putting at risk more money than you initially put in the account, so don’t forget that. And you’ll need a little patience – today is Presidents’ Day, so the US markets won’t open until tomorrow afternoon UK time.

This long-short pairs strategy would have made a killing over recent months, and it is my contention that it will do so more and more over the coming months and years.

Google has got some serious momentum behind it, and its land-grab in the technology arena is simply mind-boggling. Apple is a fantastic company, no doubt – but it just lacks the ambition that drives Google’s phenomenal growth.

And that’s why I think this trade’s best days are still ahead of us.

Got an opinion? Let us know…

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3 Responses

  1. 18/02/2014, tot777 wrote

    The problem with using spreadbetting for pairs trades is that you get penalised on the margin. By going long £2k of google and short £2k of Apple using spreadbetting, you pay the same margin as being long £4k, which is bonkers.
    The same applies for any option strategies, call spreads, straddles etc.
    Maybe buying the google shares outright and use spreadbetting to short apple is more efficient.

  2. 19/02/2014, Doris McMuffin wrote

    If sp/betting, more important to me than margin is the spread suffered on the two trades. If the position is held for a long time which I imagine it will be the cost of holding will mount up. Having said that I think it’s a good idea and the fact that the gains (or losses!) are likely to put the spreads in the shade, I will probably do it.
    With the French / German pair trade I was worried that the spread would be larger as compared to the likely gains on the trade.

  3. 20/02/2014, richstead wrote

    I am commenting on the article for the 20th Feb, subsequent to this.
    I read what has been said about money printing, however I observe that the inflation we had followed a bubble in Bank lending, not just the government deficit, but that too.The money supply during this period expanded hugely. With quantitative easing the government effectively wrote off that debt by buying it back into the B of E, which they own. It has thus been removed from circulation, money supply has shrunk, and because the banks are not lending inflation has dropped. Except on the London property market of course, where they are lending thanks to Osbournes daft scheme.

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