Two Pair Trades for the Holidays

Every season has its winners and losers, setting the table for absolute return investors interested in pair trades.
By Jamie Dlugosch ,

MINNEAPOLIS (Stockpickr) -- Every season has its winners and losers, setting the table for absolute return investors interested in pair trades. In a pair trade, an investor buys long a stock expected to increase in value and sells short a stock with less-promising prospects.

How do you find those winners and losers this holiday season? Start with the shopping trends for this year's must-have gifts. On the flip side, investors can identify gifts that might not be doing so well. There is plenty of fodder to choose from.

Here are

two pair trades using this approach

.

Long Microsoft, Short Yahoo!

I can honestly say that I would have never thought of

Microsoft

(MSFT) - Get Report

in a million years as a top seller for Santa. In my view, the giant software maker had made so many missteps over the years with respect to the technology markets that it had essentially become irrelevant. The company was fat and happy.

Microsoft had become a monopoly, and monopolies are not known for innovation. Surely Microsoft tried to stay ahead of the game, but the company always seemed to be reacting after the fact by copying the latest idea. Microsoft hasn't really seemed to be in the lead on anything over the last 10 years.

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That trend may be changing with the red hot Kinect for its Xbox counsel. Taking straight aim at Nintendo's few-years-old and very popular WII system, the Kinect allows users to play video games without clumsy handheld controllers.

Instead, Kinect tracks body movements, allowing users to feel as if they are part of the game -- hence the name Kinect. It has a very strong feel of virtual reality, and so far users reportedly love the device.

Despite the video game market being saturated and fairly mature, this new innovation promises to invigorate the space. I would be a buyer of Microsoft stock in anticipation of big sales numbers during the current holiday season.

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At one point, Microsoft came very close to owning fellow moribund internet company

Yahoo!

(YHOO)

. The search engine and internet portal pioneer had been lapped and then some by

Google

(GOOG) - Get Report

. Despite having had a head start over Google and a very significant audience of users, Yahoo! had done little with that advantage.

So many other Internet and technology players have created profitable business opportunities, leaving Yahoo! in the dust. Look at what

Amazon

(AMZN) - Get Report

has done with its Kindle. That product was outside of the box for Amazon, yet its success has helped propel Amazon to new heights.

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Yahoo! has done absolutely nothing aside from a design change to its home page. That nothingness translates to into a stock that has done nothing for investors. I expect that trend to continue.

As others shop at Amazon and

eBay

(EBAY) - Get Report

and search the Internet at Google, Yahoo! ends up sitting idly by. In a way, Yahoo! has become what I previously loathed about Microsoft. I would sell short Yahoo! in a pair trade with Microsoft.

>>Who Owns Yahoo!?:

George Soros

Long Amazon, Short Barnes & Noble

Speaking of Amazon, the company has to be absolutely thrilled with how things are going this holiday season. Black Monday, the day when Internet sales fly as workers return to their desks and computers, crossed the billion-dollar mark this year.

That that has to be good news for Amazon, the leader in Internet sales. More important, the news is likely to be positive for its Kindle book reader device. The hot gift from last year looks to be continuing the trend this year.

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The big difference this year is that the company faces heavy competition from

Apple

(AAPL) - Get Report

and its iPad. Instead of cannibalizing sales from Amazon, the iPad is helping expand the market for electronic books.

Key to Amazon's strategy is to dominate the e-book store. There it has applications for all other smart reader and smartphone devices, including Apple. Investors should expect big things from Amazon this year.

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While some of this year's success already priced into the stock, there are more gains to be had. I would not hesitate to buy long Amazon as part of a pair trade.

With the rise of online selling comes the fall of the brick-and-mortar store.

Barnes & Noble

(BKS) - Get Report

has been dying a slow death over the last few years. This holiday season will not save the company in my opinion.

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In reaction to the success of the Kindle device from Amazon, Barnes & Noble developed its own e-reader, the Nook. It is an admirable effort, but consumers vote with their pocket books. My read of the market suggests that Nook sales are significantly behind Kindle.

From a pair trade perspective, investors are not looking for fast profits. I do not expect to see Barnes & Noble disappear in a flash. Instead the slow death continues.

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Barnes & Noble will be a single digit stock soon. As such, investors can safely short Barnes & Noble as part of a pair trade with Amazon.

To see these stocks in action, check out the

Pairing Santa's Winners and Losers

portfolio on Stockpickr.

RELATED LINKS:

>>4 Gold and Silver Breakout Stock Plays

>>7 Stocks Insiders Are Buying Like Crazy

>>How to Trade This Week's Earnings

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At the time of publication, author had no positions in stocks mentioned. Jamie Dlugosch is a founder and contributor to

MainStreet Investor

and

MainStreet Accredited Investor

. Formerly, he was president and CEO of Al Frank Asset Management. He has contributed editorially to

The Rational Investor

,

The Prudent Speculator

,

Penny Stock Winners

and

InvestorPlace Media

.

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