The Goldman Pair Trade In Machinery: PACCAR Upgraded, Terex Downgraded

Paired trade is a trading strategy that focuses on taking opposing positions in a pair of security in a bid to mitigate risk. In simple terms, it is matching a long position with a short position in two highly correlated securities.

Goldman Sachs in a note released on Wednesday recommended a paired trade in the machinery sector, with the firm upgrading PACCAR Inc PCAR, while downgrading Terex Corporation TEX.

Upgrading Paccar To Buy

Analysts led by Jerry Revich upgraded shares of Paccar to Buy from Neutral, while maintaining the price target at $79. The analysts remain positive on the company's prospects to improve its industry-leading returns on capital further, premised on U.S. engines starting to generate aftermarket sales and the expansion in the manufacturing footprint slowing (Check out Jerry Revich's track record).

Goldman expects electronic standards in the U.S. to drive a re-acceleration in the U.S. truck cycle in 2018.

"We see 8 percent upside to FactSet consensus and note the upgrade shifts the mix of our Buy ratings to higher-returns businesses," the firm said.

Downgrading Terex On Valuation

Goldman downgraded shares of Terex to Neutral from Buy, as the stock trades in-line with its 12-month price target of $37. The firm clarified that its Buy-rated stocks present 22-percent upside from current levels.

The firm said it remains positive on Terex's turnaround plan.

"But with capital re-allocation initiatives nearly complete and the stock now trading at 13x our unchanged mid-cycle EPS estimate of $2.90, we believe the risk-reward has moved into balance," the firm clarified.

Since added to its Americas Buy list on June 8, the form noted that Terex shares have appreciated 74 percent compared to its coverage average of a 22-percent gain and the 20-percent gains for the Russell 2000.

Industry View Attractive

Goldman reiterated its Attractive view on the machinery sector, citing a trio of factors:

1. Machinery share of capex being in the early stages of normalizing.
2. Company-specific restructuring actions providing scope for structural margin improvement.
3. Mid-cycle valuation risk-reward remaining attractive for its top picks.

At Time Of Writing:

• Paccar shares were advancing 1.69 percent to $64.97.
• Terex shares were down 1.77 percent at $35.56.