Dual-class arbitrage trading is a simple three-step strategy.
1) Identify two publicly traded stocks of the same company at different prices.
2) Short the high-priced shares (X) and buy the low-priced shares (Y). Pocket X-Y.
3) Sell Y and buy X when the price of X and Y are equal.
Lennar fits the bill. Lennar Corporation (NYSE:LEN)(NYSE:LEN.B), founded in 1954, is headquartered in Miami, Fla., and is a leading builder of quality homes.
My broker, IB, indicates there’s ample liquidity to short at least 1,000 shares today.
Lennar has 148,575,861 Class A shares and 9,661,358 Class B shares. All shares have equal cash-flow rights. The voting rights are different though.
|Ticker||Current price||Voting rights||Comment|
|LEN||$ 14.1||1 votes||Market cap of $ 2.3 B.|
|LEN.B||$ 10.4||10 votes||Negative value of voting rights !|
Historical spread of LEN versus LEN.B.
So why do stocks with identical cash-flow rights trade at different prices?
1) The different classes are owned by different groups. Different groups behave differently causing short-term discrepancies. This is the case with Berkshire’s A-shares versus Berkshires B-shares.
2) Even though voting rights alone do not generate cash income, investors are sometimes willing to pay a premium for super-voting shares.
3) One class of shares may be included in an index while the other is not. This causes index-funds to temporarily bid up (or down) one class while the other is ignored.
Though there are examples of gaps persisting for decades, more often than not, a double-digit spread will close within a year. Research indicates the prices of all dual class shares will at some point reflect the underlying cash-flow rights.
Disclosure: This is not a recommendation to buy, sell or short anything. I had no position in any of the stocks mentioned at the time of writing.