This article is part of our Rising Star Portfolios Series.
One of the great thrusts of modern investment theory is that the market is efficient. But decades of value investors -- greats such as Warren Buffett, Seth Klarman, and Walter Schloss -- have ferreted out pricing inefficiencies that they've then exploited for nice gains. One of the more interesting places where such inefficiencies occur is in dual-class share structures.
Dual share structures often result from a special corporate transaction or reorganization of some sort. That was the case with shares of Chipotle
A few years ago, Mueller Water
You'll see a similar case with my recent Rising Star buy recommendation of Grupo PRISA
The PRISA B shares offer nearly a $0.96 yearly dividend for the next three years or so (about an 8% annual yield) and then transform into A shares. The dividends are cumulative, too. So which would you expect to trade at a higher price? Well, they trade at approximately the same price, and sometimes the A shares even cost more than B shares. The B shares offer a better margin of safety on an already cheap stock.
If the market is efficient, why does this discrepancy exist? Or is this somehow an example of efficiency?
This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios) here.
Jim Royal, Ph.D., owns shares of McDonald's. Chipotle is a Motley Fool Rule Breakers selection. Chipotle and Mueller Water are Motley Fool Hidden Gems recommendations. The Fool owns shares of Chipotle and Grupo Prisa Class B stock. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.