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Pair Trades and the Search for Absolute Returns

I would close this pair trade. Microsoft has been stuck in a rut for a decade, and the risk of a buy-out premium on Yahoo! is not worth the risk on the short side.

Long Amazon/Short Barnes & Noble

Speaking of acquisition risk, the Amazon (AMZN)/ Barnes & Noble (BKS) pair trade has been sabotaged by the bidding up of Barnes & Noble by a potential acquirer. Barnes & Noble is up nearly 50% since Dec. 3. Amazon has gone up as well in the same period (up 6%) but not nearly enough to keep returns in this pair trade on the positive side.

This pair trade should be closed.

Long Caribou/Short Starbucks

The coffee house battle continues with Starbucks (SBUX - Get Report) making a solid recovery over the last six months. Since I recommending selling it short on Dec. 22, Starbucks has gained 6%. Tiny rival Caribou Coffee (CBOU) also gained value in that time, adding 7% to its market capitalization.

Investors in this pair trade have made a small gain. I'm still skeptical of Starbucks and its potential for future growth. Long term there is simply more for Caribou to accomplish. I like this pair trade and would keep it intact.

Long Sirius XM/Short Cumulus Media

Who said pair trades are boring? Investors can make big money when placing a pair trade that delivers on both the long and short side of the equation. That has been the case in spades with my long Sirius XM (SIRI) and short Cumulus Media (CMLS) recommendation.

Sirius XM is up 22% and Cumulus Media is down 24% since Dec. 22. Combined, the net result for investors is a huge gain. Clearly the demise of terrestrial radio has had a negative impact on Cumulus, while satellite radio continues to gain traction.

The trend will likely play out for the foreseeable future, but I am recommending that investors close this pair trade. Locking in big gains is never a bad idea.

To see these stocks in action, check out the Pair Trades Update portfolio.  

-- Written by Jamie Dlugosch in Minneapolis.

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At the time of publication, author had no positions in stocks mentioned.

Dlugosch is the editor of Penny Stock Winners. He has over 20 years of experience in financial markets including investment banking, equity analysis and research and money management. In addition to being the Editor of Penny Stock Winners, he is also a Contributing Editor of InvestorPlace.com and founder and editor of The Rational Investor.
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