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 (LEN, Financial)(LEN.B, Financial), 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.
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.
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 (LEN, Financial)(LEN.B, Financial), 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.
