Insider Action Flags Retail Paired Trade

This column was originally published on RealMoney on Dec. 14 at 10:25 a.m. EST. It's being republished as a bonus for TheStreet.com readers.

I certainly am glad I did not act as negatively on retail as my top-down opinion would suggest. I'm on record as being concerned about the ability of U.S. consumers to keep going their profligate ways, given the group's high debt, low savings and the tall hurdle of energy prices, which are still high even if off the peaks. And if housing prices merely level off, it may be enough to put a systemic crimp in the ability of this nation of heavy spenders to fund purchases with new home-equity loans.

I just can't translate the continued strength of U.S. consumer spending as a signal that none of these negatives matters. What hasn't killed the U.S. consumer hasn't made him stronger. The U.S. consumer is more like a boxer at the end of a lengthy fight: still standing, but the struggle has made him more vulnerable, not more resilient.

However, consumer sentiment has bounced back recently, and there is talk that some retailers may post some decent Christmas sales. What has most affected my strategic moves in retail, however, has been the surprising amount of insider buying in retail names. I checked out Internet retailer RedEnvelope(REDE Quote) for a quick little profit back in September, and I still have a large gain in specialty consumer electronics seller Tweeter(TWTR Quote) despite the stock's recent pullback.

Restoration Hardware vs. Saks

But as I began entertaining buying yet another retailer, the top-down curmudgeon in me just couldn't stand being so heavily weighted in a sector with so much logic against it. Fortunately, negative insider activity at another company has opened up the opportunity for a sort of paired trade in retail. And so I recently bought Restoration Hardware(RSTO Quote) while shorting Saks(SKS Quote).

For sure, this is not a perfect pairing. Though both firms are technically in the same sector, Restoration sells home furnishings and fixtures, while Saks' upscale department stores have much more exposure to clothing.

I like the mismatch, though. With long-term interest rates threatening to not rise much more, the housing sector could end up being firmer than many think possible. That should help Restoration's business. At the same time, I see no end to the outlets available for consumers to buy brand-name and generally good-quality clothing at a discount.