Automotive history was made last week when a 1962 Ferrari 250 GTE sold for $38,115,000 at the Bonhams Quail Lodge Auction.
It was the most expensive car ever sold in an auction-style format.
The car is famous for a fatal accident during a race at Montlhéry, France in 1962 that killed French Olympic ski champion, Henri Oreiller.
After the accident, the car was rebuilt by the Ferrari factory.
Now, since the S&P 500 also sits in record-setting territory, I went back to 1971 and pitted the stock market against the luxury-vintage car market.
The results were nothing short of spectacular.
During my research, however, I discovered something even more fascinating. That is, a rare market anomaly with the potential to make you a fortune in the weeks ahead.
First, let’s review the results from my research…
As it turns out, the stock market doesn’t even come close to measuring up.
Below is a list of the top 14 car auction sales of all time, beginning in 1971 with the sale of a Bugatti Type 57SC Atlantic Coupe.
Over the last 43 years, sale prices in the high-end luxury-vintage car market have expanded by nearly 11,000%. The S&P 500 has only appreciated by 1,834% over the same period.
I suspect it would’ve been much closer had I used the returns of the financial markets’ best-performing asset class, rather than just the benchmark for U.S. stocks.
Nonetheless, stocks alone were no match for Ferraris, Alfa Romeos, Mercedes, and Bugattis. And the vintage-luxury car market continues to explode.
Values of collectible Ferraris shot up 62% in 2013 alone, and the value of all high-end collector cars has jumped 47%.
What’s interesting to note, however, is that shares of high-end auction house Sotheby’s (BID) are in decline. (Even though Sotheby’s specializes in fine art and jewelry, this market typically shares a strong correlation with the luxury-vintage car market.)
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As it turns out, Sotheby’s has been publicly feuding with activist investor Daniel Loeb, which hasn’t been good for business.
As one industry insider describes, “The uncertainty around the future management and direction of Sotheby’s has very likely caused some hesitation for clients.’’
Loeb and Sotheby’s have since tabled their seven-month feud, however, they have made an agreement to add board seats for Loeb and two of his allies.
How to Play a Convergence
The fact that Sotheby’s has settled its feud with Loeb puts a fantastic investment opportunity on the table. That is, since the high-end auction market is otherwise quite robust.
It’s a perfect situation for what’s called a “pairs trade.”
A pairs trade seeks to profit from a temporary disconnect in two historically correlated securities.
The trade is executed by shorting the outperformer (the high-end luxury market) and going long the underperformer (Sotheby’s), betting that the “spread” between the two will converge.
All we need to execute this trade effectively is an outperforming stock to use as a proxy for the high-end luxury market.
That stock is Tiffany & Co. (TIF).
The beauty of a pairs trading strategy is that it’s market-neutral. Whether the stock market goes up, down, or sideways over the next few weeks, the convergence of Sotheby’s and Tiffany should put a nice premium in your pocket.
Just take note, though… shorting stock does require that you open a margin account.
Onward and Upward,
Founder, Wall Street Daily