- High Correlation in Ridesharing Services
- Uber’s Bad Tax Break
- Why Does this Apply to LYFT?
High Correlation in Ridesharing Services
In professional investment circles there is something known as the peer comparison method for finding undervalued stocks. This method can be employed effectively with either complex or simplified procedures, but in both cases the common thread is to find which of two stocks is more undervalued and likely to increase its price faster than the other.
Professional portfolio managers will sometimes use a variation of this method to determine where to allocate available capital on a month by month basis. Nowadays two such stocks likely to receive consideration for peer comparison would be UBER and LYFT. Though there are clear differences between these companies, investors treat them in substantially similar ways.
Over the past three years the stock prices of these ridesharing companies have shown a high degree of positive correlation. This has held true despite the varying business realities they both experience. For example, right now they should likely differ more than they have in just the past few days.
Uber’s Bad Tax Break
Wednesday Uber reported earnings. The news for the top line was slightly better than expected. The news for the bottom line was much worse than expected. Company officials attributed the tighter profit margin to a small decrease in demand, and some international challenges. However, they expect to stabilize their effective tax rate in the low 20s just like other big companies do! As you can see on the chart, the market isn’t buying it.
Though the stock price did rebound somewhat off its lows during Wednesday’s session, one item that didn’t show up on the price chart was the purchase of 20,000 put option contracts at the 65 strike price. Someone spent 1.5 million dollars betting that Uber would fall another 17% between now and mid-March.
The pessimism is real.
Why Does this Apply to LYFT?
That brings us to Lyft, that other ride-hailing company. Whatever Uber’s challenges are, they bear only a passing resemblance to Lyft’s. The complexity of navigating expectations for driverless technology, tax and pricing strategies, and driver-incentives to provide product availability are all so company specific that the day to day valuation of each company can vary widely.
But you wouldn’t know it if you stepped back far enough to get a look at their charts. Herein lies the opportunity for enterprising traders and active investors. If Uber and Lyft have relative valuations that change so much, shouldn’t it be possible to derive value from tactical allocation between the two companies? It is tempting to consider.
This chart includes a simple quick and dirty algorithm for when to buy Lyft at what may be a strategic opportunity for timing purchases. Following this methodology you could have outperformed buy-and-hold over the past two years (note the size of the green arrows compared to the pink or yellow ones).
It is important to thoroughly research any decision-making methodology when it comes to active trading and investing, but it is perhaps more important to know how your system manages risk. If with each trade you only risk one percent of your capital, then you are highly likely to find a system you can work well with.
Shared content and posted charts are intended to be used for informational and educational purposes only. CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. CMT Association does not accept liability for any financial loss or damage our audience may incur.
