When Bill Mann recommended Chipotle Mexican Grill
"Considering the B shares have the identical claim on earnings, cash flows, and assets as the A shares, receive 10 times the voting power, and currently trade for 6.5% less, it's a story worth sharing," he wrote.
Chipotle has had its ups and downs lately, but surely the more potent B shares have closed the gap, right? Nope. As of last night's close, Chipotle's B shares were trading at nearly an 8% discount to the more popular A shares.
The disparity gets even wider when Blockbuster
|
1/13/09 |
Discount |
|
|---|---|---|
|
Chipotle |
$52.26 |
|
|
Chipotle "B" |
$48.26 |
(7.7%) |
|
Blockbuster |
$1.36 |
|
|
Blockbuster "B" |
$1.02 |
(25%) |
Reasons for the markdowns
The pricing disparity between common stock and presumably more valuable B shares provided a head-scratching opportunity for Mann two years ago, just as it poses a puzzling situation for investors today. If you want to buy into the burrito roller or the flick renter, do you add the "-B" to the end of the ticker as if you're getting a nifty brokerage discount?
Before you decide, it's probably best to analyze the various reasons for the discrepancy. There are actually a few explanations behind the markdowns:
- Most investors and writers associate a stock with its more common ticker symbol. Punch in both ticker symbols into any financial portal, and you will see far more stories for the Class A shares than you do for the Class B alternatives.
- Popularity has its perks. CMG-B has traded an average of 164,662 shares daily over the past three months. CMG has more than tripled that daily rate at 496,659. The gap is even wider at Blockbuster -- 2.3 million vs. less than 400,000 -- on an average day. Lighter trading, in theory, will create wider bid-ask spreads and trickier liquidity problems for institutional investors.
There is a third reason, one that may explain why the discounts have actually widened lately. Hedge funds love the arbitrage plays. They will buy the lower-priced B shares, short an equal amount of the A shares, and cash in when logic wins out.
Unfortunately, hedge funds have been getting slammed since last year. The run on redemptions is likely forcing many funds to sell their Class B stakes, and buy the Class A stakes to close out their short positions.
Not all grades are equal
Even if this all makes sense, you may still be wondering why Blockbuster's discount is so wide when compared to Chipotle's.
Let's bring in GameStop
In 2004, Barnes & Noble sold 6.1 million shares of its Class B stock to GameStop (at a 3.5% discount to the supposedly inferior Class A common, it should be noted). The rest of the bookworm superstore's stake was distributed to its shareholders. GameStop eventually converted its B shares into Class A stock, on a one-to-one basis.
Now you have to ask yourself which company -- Chipotle or Blockbuster -- is the more likely company to execute a stock swap, or simply dive right in and start a buyback of the Class B shares at market prices. Chipotle has the healthier balance sheet, so it's a clear candidate to either convert its Class B stock, or simply aggressively repurchase the stock at a discount.
One last passing grade
This doesn't mean that all A and B disparities are the same. Berkshire Hathaway
Discounts between the two ways to buy Berkshire Hathaway are typically negligible on a percentage basis, and that's with the B shares trading in far greater volume (though not necessarily market cap volume) as the original shares.
So what does this all mean for investors eyeing deals that appear too good to be true on super-voting B shares? Just as investors can't buy into a closed-end mutual fund that trades at a steep discount to the value of its assets and expect to be cashed out at asset value, Class B investors need to realize that there is no such thing as a free lunch on Wall Street.
Further slings and arrows of outrageous Fooldom:
