Pairs trades can offer interesting insights. For example, a ratio of consumer discretionary stocks vs consumer staples reveals a lot about consumer confidence, or the ratio between small caps and large caps which offers insight on the broader economy.
Currently, an interesting situation is brewing in the fitness industry with two different stocks - Peleton
Peleton
Peleton's strength makes sense. The company's sales have accelerated due to the shutdown and the closing of gyms. The company's bikes quickly went out of stock and it even stopped running ads. It also seems based on recent evidence that outbreaks are being traced to indoor spaces. Examples are public transportation and churches. Therefore, it seems likely that spin classes will be one of the last things to fully come back given they take place in a confined space with heavy breathing with it being difficult to wear masks. Before the coronavirus, Peleton was seen as a luxury item with a limited market. This calculus has changed.
Further, the company has many features of a tech company. It's a subscription business where each customer pays around $40 per month for the company's classes. It also has social network-like characteristics as people can keep track of their stats, ride with friends, and compete with others. And, it's growing fast with juicy margins and a first-mover advantage. The company is also looking to introduce bikes on the lower-end. Long-term, the company seems to be less focused on making money on bikes and more on getting users hooked with its virtual classes.
Planet Fitness
Contrary to Peleton, Planet Fitness has an old-school business model. Its gyms are priced very reasonably, and the company's goal is to sign up as many members as possible. While Peleton's recent success intuitively makes sense, Planet Fitness' recovery is puzzling.
Even if economies reopen, it seems that people may not be reluctant to immediately go back to the gym especially during warm-weather months. Also, many places are instituting limits on how many people can be allowed into gyms, and many gyms are erecting dividers between machines and different areas. All of these will result in higher costs.
Pre-coronavirus, the stock had been a winner in terms of opening new locations, earnings, and revenue growth while maintaining gross margins above 50%. The company had 2,000 locations with 14 million members, and its goal was to expand to 4,000 locations in the U.S. and look for international opportunities.
The bear case for Planet Fitness is that the combination of lower revenue due to member cancellations and higher cots will lead to weaker earnings. The bull case is that all gyms are going to suffer due to these factors, but Planet Fitness is going to be the ultimate winner since it has the deepest pockets. Additionally, retail space is going to be available for cheaper which will allow it to win more market share in the long-run.
