The Lunch Wars: Soup vs. Beans
- Posted by Greg Harmon
- on January 6th, 2011
Since Morgan Stanley stole my thunder on reigniting the cola wars with their recommendation to go long Pepsi (ticker: PEP) and short Coke (ticker: KO) I am left to explore the great winter lunch battle:
Soup vs. Beans
Clearly this battle has been raging for centuries with Beans holding the upper hand until recently and they are now losing some gas. Seriously, this pairs trade involves HJ Heinz, (ticker: HNZ) the maker Heinz Beanz and Campbell Soup, (ticker: CPB) the maker of… soup.
Below is a 12 month ratio chart of the two stocks.
This ratio has been moving higher from late August until mid December when it peaked. Today it passed downward through two key areas of support. First is the 1.41 level of support and resistance that was also the gap up in early December. The second is the 50 day Simple Moving Average (SMA) also at the 1.41 level. Cracking these levels today is the signal to favor CPB over HNZ going forward. This can be done by buying CPB and selling short an equal dollar amount of HNZ. I look for this ratio to move back to at least 1.36 where the 100 day SMA and the 38.2% retracement of the move up intersect, a quick 3%. Targets below would include the 1.34 support area from October and then 1.33, a 50% retracement. The 1.41 level could be used as a stop to exit the trade. If you question the use of the ratio, look at the two independent charts below.
The recent trend on HNZ has been down and it looks to continue at least until the 100 day SMA or the 47.60 area. CPB has been moving higher and had a healthy pullback recently, and today closed through the 50 day SMA moving higher. If both continue their current trends the initial target could be met quickly tomorrow.
By the way, the KO:PEP trade came closer to triggering today. Keep an eye on it.
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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Gregory W. Harmon CMT, CFA, has traded in the Securities markets since 1986. He has held senior positions including Head of Global Trading, Head of Product Development, Head of Strategy and Director of Equity. (More)
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