Stocks pairs trading: LW vs CLX
Let's examine the trade potential for Lamb Weston Holdings (LW) and Clorox (CLX) by analyzing their key financial metrics and recent performance to determine reasons for going long on LW and short on CLX.
Price-to-Earnings (P/E) Ratio:
LW: P/E ratio of 10.50
CLX: P/E ratio of 68.01
LW has a significantly lower P/E ratio, indicating it is undervalued compared to CLX, which has a very high P/E ratio suggesting it might be overvalued.
Earnings Growth:
LW: EPS next Y of 10.59%
CLX: EPS next Y of 9.26%
LW shows higher expected earnings growth for the next year, reinforcing its potential for better performance.
Debt and Liquidity:
LW: Debt/Eq of 2.21
CLX: Debt/Eq of 33.19
LW has a considerably lower debt-to-equity ratio compared to CLX, indicating better financial stability and lower financial risk.
Profitability Metrics:
LW: ROA of 17.75%, ROE of 88.53%
CLX: ROA of 4.13%, ROE of 510.64%
Return on Assets (ROA) and Return on Equity (ROE) are both measures of profitability. ROA indicates how efficiently a company is using its assets to generate profit, while ROE measures how effectively the company is generating profit from shareholders' equity.
Although Clorox (CLX) has a higher ROE, implying it generates more profit per dollar of equity, its extremely high debt (33.19 Debt/Eq) inflates this figure. Lamb Weston (LW), with a higher ROA, shows better asset management efficiency, indicating it is more effectively utilizing its assets to generate earnings without relying heavily on debt.
Performance Metrics:
LW: Perf Year of -30.64%, Perf YTD of -27.31%
CLX: Perf Year of -15.00%, Perf YTD of -7.84%
Both stocks have underperformed, but LW's significant price drop could present a buying opportunity if recovery prospects are solid, as noted by recent improvements in its margin outlook and cost synergies.
Decision:
Long on 2 LW
Short on 1 CLX
LW's attractive valuation, strong earnings growth potential, and improving margins make it a strong buy, while CLX's high valuation and substantial debt pose risks, justifying a short position.
Price-to-Earnings (P/E) Ratio:
LW: P/E ratio of 10.50
CLX: P/E ratio of 68.01
LW has a significantly lower P/E ratio, indicating it is undervalued compared to CLX, which has a very high P/E ratio suggesting it might be overvalued.
Earnings Growth:
LW: EPS next Y of 10.59%
CLX: EPS next Y of 9.26%
LW shows higher expected earnings growth for the next year, reinforcing its potential for better performance.
Debt and Liquidity:
LW: Debt/Eq of 2.21
CLX: Debt/Eq of 33.19
LW has a considerably lower debt-to-equity ratio compared to CLX, indicating better financial stability and lower financial risk.
Profitability Metrics:
LW: ROA of 17.75%, ROE of 88.53%
CLX: ROA of 4.13%, ROE of 510.64%
Return on Assets (ROA) and Return on Equity (ROE) are both measures of profitability. ROA indicates how efficiently a company is using its assets to generate profit, while ROE measures how effectively the company is generating profit from shareholders' equity.
Although Clorox (CLX) has a higher ROE, implying it generates more profit per dollar of equity, its extremely high debt (33.19 Debt/Eq) inflates this figure. Lamb Weston (LW), with a higher ROA, shows better asset management efficiency, indicating it is more effectively utilizing its assets to generate earnings without relying heavily on debt.
Performance Metrics:
LW: Perf Year of -30.64%, Perf YTD of -27.31%
CLX: Perf Year of -15.00%, Perf YTD of -7.84%
Both stocks have underperformed, but LW's significant price drop could present a buying opportunity if recovery prospects are solid, as noted by recent improvements in its margin outlook and cost synergies.
Decision:
Long on 2 LW
Short on 1 CLX
LW's attractive valuation, strong earnings growth potential, and improving margins make it a strong buy, while CLX's high valuation and substantial debt pose risks, justifying a short position.
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