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Profiting With "Pair" Trades

Cort Gwon, Director of Trading Strategies and Research for FBN Securities, suggests a trio of "pair" trades to make money in a directionless market.

NEW YORK (

TheStreet

) -- Employing a "pair" strategy may help retail investors take advantage of current market conditions, according to Cort Gwon, Director of Trading Strategies and Research for FBN Securities.

"False starts and sell offs will characterize the markets as portfolio managers struggle to find trends and will be frustrated with their investment returns," says Gwon of the climate these days as indications of a stalled recovery in the economy could render the major U.S. equity indices range-bound in the near term.

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Stocks

fell sharply

on Tuesday on news that existing home sales fell more than 27% in July, rekindling investor fears of a double-dip recession.

Gwon points out that this kind of trading environment is positive for sector rotation where returns can be pulled out of the general volatility in the markets. strategy is both market- and industry-neutral, Gwon says, putting the risk on individual stock performance.

His focus recently turned to pair trades, where he looks for two companies that are industry leaders and then chooses one to buy while shorting the other. The strategy is both market- and industry-neutral, Gwon says, putting the risk on individual stock performance.

Here are three pairs in the Gwon's crosshairs at the moment.

The first pair trade Gwon highlights involves home improvement chains

Home Depot

(HD) - Get Report

and

Lowe's

(LOW) - Get Report

.

The tax credit for home buying has expired and the latest economic data for housing has shown a four-month decline in single family housing permits. The job market hasn't improved and many consumers are becoming increasingly nervous about the threat of a double-dip recession.

Lowe's recently reported its numbers and while net revenues were up, the company sounded a cautionary tone for the rest of the year. Home Depot beat profit forecasts when it reported, but sales missed.

Gwon notes that the companies are industry leaders and have similar cost and pricing structures. He feels sentiment is negative for Lowe's right now, and is taking a contrarian stance and going long on the stock.

From a valuation perspective, Lowe's trades at a 14x price-to-earnings multiple, Gwon says, while Home Depot -- the short in the trade -- is at at 16x multiple.

Gwon is also looking at

WellPoint

(WLP)

and

United Healthcare

(UNH) - Get Report

. Both are healthcare companies so the impact of reform is a big issue.

According to Gwon, Wellpoint's stock is presently trading at a 9x price-to-earnings multiple and is sitting at a 30% discount to its historic price. The company also recently topped Wall Street's expectations for the second quarter and raised its outlook for the year.

Meanwhile, United Healthcare has also delivered strong revenue growth, but since it's not trading at the discount that WellPoint is, Gwon says he would be long WellPoint and short United Healthcare.

Finally, Gwon takes a look at department store operators

Macy's

(M) - Get Report

and

J.C. Penney

(JCP) - Get Report

.

J.C. Penney recently posted a profit for the latest quarter, but cut its forecast for the full year, while Macy's raised its outlook and is gaining market share and seeing sales increase.

Comparing the two, Macy's stock price has run up 20% year-to-date while J.C. Penney's has done the opposite, so Gwon's strategy would be to again take the contrarian viewpoint and go long J.C. Penney and short Macy's.

--

Written by Debra Borchardt in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.