Stingy Investor Search - Contact - Subscribe - Login
  Home | Articles | Links | SNW
 
The fine art of cashing in on class differences

Dual-class stocks can provide some interesting profit possibilities. If you keep an eye on the spread between the two classes of shares, and swap at the right time, you can be handsomely rewarded.

It's a strategy that has its risks, but can allow you to take advantage of a market that is not quite as ruthlessly efficient as the economists would like to believe.

Consider the case of Gray Television Inc. It's a small company that hails from Atlanta and operates 36 TV stations in the United States.

Gray has two classes of stock. They're identical except for one difference: The A class shares (GTN.A) shares have 10 times the votes of the common shares (GTN). Therefore, it would seem that the A shares should be worth more than the common shares because of their greater voting rights.

On the other hand, the common shares trade more frequently than the A shares. The extra liquidity makes them more attractive to short-term investors, who want assurance they can get in and out of the stock without trouble.

No matter how these two factors interact, the preferences of investors should be relatively stable over time. That is, the spread between the common shares and the A shares shouldn't vary too much in a rational market.

In practice, however, the spread between Gray's two classes of shares has been as stable as a monkey on a banana bender. Check out the wild swings in the accompanying graph.

Gray TV Spread
[larger version]


The A shares have traded at a discount of more than 10 per cent to the common shares on several occasions. On the other hand, they changed hands at a huge premium to the common shares after the 2008 stock-market collapse.

Neither liquidity concerns nor voting rights really explain the enormous variation. The company was not in the middle of takeover talk - a factor that might give the A shares a boost - at the end of 2008. Indeed, bankruptcy seemed more likely at the time.

In addition, the common shares became relatively more liquid, compared to the A shares, in late 2008 versus prior periods. It seems strange that liquidity can lead to premiums in happy times when volumes are low and to discounts in bad times when volumes are high.

The simple explanation is that investors misprice stocks - even when dealing with effectively the same stock at the same time. Such anomalies are common among stocks with multiple share classes, according to a 2009 study by finance professors Paul Schultz and Sophie Shive of the University of Notre Dame.

That's good news for those who want to invest in dual-class companies because they can often trade between the classes, over time, and pick up the spread. Simply moving from the expensive to the cheap class can provide a nice boost to one's long-term returns. The more adventuresome might also consider a pairs trade - in other words, buying one class while shorting the other - but this isn't always a practical possibility.

Given the large number of dual-class stocks in Canada, it's worth keeping tabs on any you hold. You might be able to make a profitable swap between classes. Just keep an eye out for the bid-ask spreads and corporate developments, and trade carefully.

First published in the Globe and Mail, March 24 2012.

 
Globe & Mail Articles
 Portfolios

 Dividend All-Stars for 2024
 250 Megastars for 2024
 Extreme yields
 The easy way
 Smaller stable dividend
 250 Megastars for 2023
 Champagne portfolio
 Screaming Value
 Blended momentum
 Dividend monster
 Frugal dividend
 Stable dividend
 Speads and recessions
 TSX 60 for value investors
 Looking at 10-year returns
 Watching for a bottom
 Oh, bother!
 Low P/E DJIA
 Indexing advice
 Media-shy stocks
 Curse of size
 Market uncertainty
 Be even lazier
 Scary beats safe
 Small, illiquid, value
 Use the numbers
 What value is good value?
 Sculpt for value
 Value vs CAPE
 Graham Rules
 CAPE vs PeakE
 Top value ratio
 Low Beta
 Value and dividends
 Walter Schloss
 Try unloved AIG
 Why I'm a value investor
 New world of ETFs
 Low P/Es possible
 10 yielders
 Be happier
 Long-Short
 Dividend Downside
 Shiller's P/E
 Copycat investing
 Cashing in on class
 Index roulette
 Theory collides
 Diving too deep
 3 retirement villains
 Scourge of inflation
 Economic omens
 Analyst Expectations
 Value stock scarcity
 It's all in the index
 How to pick good funds
 Low Beta Wins
 Hunt for dividend stocks
 Think garage sale

MoneySaver Articles
 2 Graham Stocks for 2018
 2 Stingy Stocks for 2017
 2 Graham Stocks for 2017
 3 Stingy Stocks for 2016
 5 Graham Stocks for 2016
 3 Stingy Stocks for 2015
 3 Graham Stocks for 2015
 3 Stingy Stocks for 2014
 4 Graham Stocks for 2014
 8 Stingy Stocks for 2013
 6 Graham Stocks for 2013
 9 Stingy Stocks for 2012
 8 Graham Stocks for 2012
 Simple Way 2011
 5 Stingy Stocks for 2011
 7 Graham Stocks for 2011
 Simple Way 2010
 5 Stingy Stocks for 2010
 8 Graham Stocks for 2010
 Simple Way 2009
 Timing Temptation
 19 Stingy Stocks for 2009
 4 Graham Stocks for 2009
 Simple Way 2008
 Active at Passive Prices
 Unbundling ETFs 2008
 5 Stingy Stocks for 2008
 5 Graham Stocks for 2008
 Is your index too active?
 Graham's Simple Way
 Canadian Graham Stocks
 5 Stingy Stocks for 2007
 8 Graham Stocks for 2007
 Top SPPs
 The Simple Way
 A hole in your IPO?
 Monkey Business
 8 Stingy Stocks for 2006
 Graham Stock Gainers
 Blue-Chip Blues
 Are Dividends Safe?
 SPPs for 2005
 Graham's Simplest Way
 Selling Graham Stocks
 RRSP Money Market Funds
 Stingy Stocks for 2005
 High Performance Graham
 Intelligent Indexing
 Unbundling Canadian ETFs
 A history of yield
 A Dynamic Duo
 Canadian Graham Stock
 Dividends at Risk
 Thrifty Value Stocks
 Stocks in Short Supply
 The New Dividend
 Hunting Goodwill
 SPPs for 2003
 RRSP: don't panic
 Desirable Dividends
 Stingy Selections 2003
 10 Graham Picks
 Growth Eh?
 Timing Disaster
 Dangerous Diversification
 The Coffee Can Portfolio
 Down with the dogs
 Stingy Selections
 Frugal Funds
 Graham Revisited
 Just Spend It
 Ticker Temptation
 Stock Mortality
 Focus on Fees
 SPPs for the Long Term
 Seeking Solid Stocks
 Relative Strength
 The VR Approach
 The Irrational Investor
 Value Investing

Old MS Articles
 Cdn Top 200 2018
 Cdn Top 200 2017
 Cdn Top 200 2016
 Cdn Top 200 2015
 Cdn Top 200 2014
 Cdn Top 200 2013
 Cdn Top 200 2012
 Cdn Top 200 2011
 Cdn Top 200 2010
 Cdn Top 200 2009
 Cdn Top 200 2008
 Cdn Top 200 2007
 Cdn Top 200 2006
 Cdn Top 200 2005
 US Top 500 2018
 US Top 500 2017
 US Top 500 2016
 US Top 500 2015
 US Top 500 2014
 US Top 500 2013
 US Top 500 2012
 US Top 500 2011
 US Top 500 2010
 US Top 500 2009
 US Top 500 2008
 US Top 500 2007
 US Top 1000 2006
 Dividends 100 2017
 Dividends 100 2016
 Retirement 100 2015
 Retirement 100 2014
 Retirement 100 2013
 Retirement 100 2012
 Retirement 100 2011
 Retirement 100 2010
 Income 100 2009
 Income 100 2008
 Income 100 2007
 Top Trusts 2006
 Top Trusts 2005
 Hot Potato
 Buffett Buys
 FB IPO
 Stocks that pay
 Value in the S&P500
 Where to invest $100k
 Where to invest $10k
 Summer Simple Way
 A crystal ball for stocks?
 Cheap & safe
 Risky business
 Dividend investing
 Value investing
 Momentum investing
 Low P/E P/B
 Dividends
 Dividend growers
 Graham's prescription
 The case for optimism
 Wicked investments
 Simply spectacular
 Small stocks, big profits
 Value that sizzles
 So simple it works
 No assembly required
 Investing by the book
 Invest like the masters
 A simple way to get rich
 Stocks for cannibals
 Car bites dogs
 So easy, so profitable
 Dogs of the Dow
 Money for nothing
 Yield of dreams
 Return of the master

Advisor's Edge Articles
 Passive Rebundling
 Doing the math

Flip Books



 
About Us | Legal | Contact Us
Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, financial advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...