Back on March 8, I suggested a pairs trade in two equipment rental stocks: long United Rentals, Inc. (NYSE:URI) and short Herc Holdings (NYSE:HRI). Both companies are in the rental business and have exposure to the Oil and Gas Industry, making the correlation between the two stocks quite high, a desirable property for a pairs trade. The rationale for this trade was quite simple: HRI is still coming to grips with being a standalone company. Listed in last year's Q4 report were some of the issues impacting HRI's results:
- Additional headcount, primarily in operations and sales;
- Increase in interest expense related to debt as a standalone company;
- Lower activity in upstream oil and gas markets;
- Negative currency impacts;
- Ramp up of new locations and the addition of new fleet categories; and
- Spin-off costs related primarily to higher IT and professional expenses.
URI, on the other hand, is the largest equipment rental company and is consistently profitable, with plenty of opportunity to expand in a fragmented U.S. market.
Trade Performance to Date
For most of last 2 ½ months since the trade was suggested, the position was underwater, with the stock price for HRI outperforming that of URI. But the tides have now turned, and since the most recent quarterly reports were issued for the two companies, URI has made up lost ground and then some.