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Dual-Class Arbitrage Idea 2 – Hubbell

October 10, 2011 | About:
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.

Hubbell Inc. (HUB.A) (HUB.B) fits the bill. Hubbell manufactures and distributes electrical products and lighting used in residential, commercial and industrial applications.

My broker, IB, indicates there’s ample liquidity to short at least 1,000 shares today.

Hubell has 7,167,506 A-shares and 52,775,144 B-shares with equal cash-flow rights.

Hubbell buys back its B-shares.

Ticker Current price Voting rights Comment
HUB.A $ 46.5 20 votes Market cap of $ 3.2B.
HUB.B $ 53.0 1 vote


Historical spread of HUB.B versus HUB.A.

Schermafbeelding%202011-10-10%20om%2022.

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 Berkshire's 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.

Idea 1 - Lennar: http://www.gurufocus.com/forum/read.php?2,147502,147637#msg-147637

About the author:

batbeer2
I define intrinsic value as the price I would gladly pay to own the business outright. With current management in place. For most stocks, that value is 0. As of September 2012, I'm the author of the monthly Buffett-Munger Best Bargains Newsletter. I can be reached at fvandenbroek AT gurufocus DOT com

Visit batbeer2's Website


Rating: 3.5/5 (8 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 3 years ago
Hubbell Class 'A' traded 100 shares in total volume today.

There is no liquidity and any price you see may well be a 'stale' quote.

That makes comparison of the A and B shares useless information.
Adib Motiwala
Adib Motiwala - 3 years ago
Bat, the pricing for the two classes is inverted....
batbeer2
Batbeer2 premium member - 3 years ago
@ Adib,

Thanks, corrected. Once again we have voting rights for less than nothing. The share buy-back may be the reason why the Bs are priced higher.

@ Stockdocx99

You are right. The volume of the A-shares is low. That's the long side of the trade though. With some patience, one should be able to get the order filled at good price.

Idea #3 will be more liquid.
Adib Motiwala
Adib Motiwala - 3 years ago
Bat,

Keep them coming buddy. This is quite interesting to follow. This one has spread increasing and decreasing as well... Unlike the other idea on LEN.
Dr. Paul Price
Dr. Paul Price premium member - 3 years ago
"Bid-ask spreads are fairly large on the As. With some patience, one should be able to get the order filled at good price."

Arbitrage is the SIMULTANEOUS purchase and sale of assets designed to capture a 'spread' in asset pricing.

If you 'patiently accumulate' a position in the illiquid shares you lose any chance to simulatneously short the other side without risking an adverse move in their pricing.

batbeer2
Batbeer2 premium member - 3 years ago
Hi Stockdocx99

>> If you 'patiently accumulate' a position in the illiquid shares you lose any chance to simulatneously short the other side without risking an adverse move in their pricing.

I believe patience and simultaneity aren't mutually exclusive.
batbeer2
Batbeer2 premium member - 3 years ago
Idea # 3 is out.
Adib Motiwala
Adib Motiwala - 3 years ago
The ViaCom chart shows in $ instead of %.

Question: How do you find these ideas...if you dont mind sharing with us...

batbeer2
Batbeer2 premium member - 3 years ago
>> The ViaCom chart shows in $ instead of %.

Yes.



>> How do you find these ideas...if you dont mind sharing with us...


I track a few dozen pairs; I compiled a list.

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