Cowen Recommends Two Aerospace & Defense Earnings Pair Trades

In a new report, Cowen analysts discuss two pair trades they recommend in aerospace & defense. Analysts have only a mixed outlook for overall Q1 earnings in the space, but they see opportunity for investors via some creative trading.

What Are Pair Trades?
Rather than picking a single stock or group of stocks and betting their share prices will rise (or fall) by going long (or short), a pair trade is constructed by picking a pair of stocks and making a long bet on one of them and an equal-sized short bet on the other.
The idea behind pair trades is that the trader will profit on the relative outperformance of the long stock over the short stock, regardless of how the sector or market performs overall.

The trades
In light of their mixed overall views on the aerospace & defense sector, analysts recommend the following two pair trades:
1. Long Spirit AeroSystems Holdings Inc SPR/Short Triumph Group Inc TGI
Spirit is a top pick at Cowan, and analysts like the stock’s “booming free cash flow” and 14X 2016 projected price-to-earnings ratio (P/E). They also see upside to the company’s Q1 earnings expectations. By comparison, analysts see very little upside earnings upside potential for Triumph.
2. Long Cytec Industries Inc CYT/Short Precision Castparts Corp PCP
Analysts like Cytec’s valuation and point out that the stock trades at a 20 percent P/E discount to Hexel Corp HXL. Precision, on the other hand, faces “many headwinds” that could result in weak Q1 numbers and 2016 guidance.