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2 Pair Trades for Stocks Under $5

Long Pilgrim's Pride/Short Pulte Group

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If there ever was an industry teetering on the edge it would be the homebuilding sector. This already beaten up industry cannot afford a double dip recession. Companies in the space have lost much and will likely lose more if the economy contracts.

I'll short Pulte Group (PHM) in a pair trade. The company is on pace to lose 22 cents per share this year. Analysts are expecting the company to make 19 cents per share in 2012. Those numbers are likely to be too optimistic for an economy on the downturn. Shares of Pulte trade for less than book value, but if the company keeps losing money that book value will shrink in a double-dip environment.

Foreclosures are still a major problem for the industry. In a market with too many sellers and not enough buyers Pulte is likely to struggle no matter what the economy does from here. The recovery of the homebuilding sector will take many, many years.

On the long side of this pair trade I would buy long shares of Pilgrim's Pride (PPC). The big chicken company has been hurt by increasing feed costs. At a time when the company is attempting to return to profitability, slimmer margins are painful. Investors have sold the stock hard over the last year with shares dropping from a high of $8.61 per share to its current price of $3.50.

Although Pilgrim's is losing money, a trait I mention earlier as being problematic for a stock trading under $5, I would view this company as more of a defensive play. Consumers will eat poultry no matter what is transpiring in the economy. The volatility of sales and profits are likely to be less with Pilgrim's than other stocks with similar traits. As such, I would look for the company to continue its turn-around and investors to be long this stock in a pair trade.

To see these trades in action, visit the 2 under $5 stock pair trades portfolio on Stockpickr.

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-- Written by Jamie Dlugosch in Minneapolis.

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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