How to get massive stocks at a discount
In this segment of “The Morning Show” on Motley Fool Live, recorded on December 13, Fool Director of Small Cap Research Bill Mann and senior analysts Jim Gillies and Jim Mueller discuss how investors could buy a cheaper share class to save money.
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Bill Mann: Basically, you should always buy the cheaper of the two options. I think it’s just that people don’t understand what this other is. We see it so I talked about it Volkswagen (OTC: VWAGY) earlier. Volkswagen has common stock and they have preferred stock and in the US and Canada, preferred stock describes something very different and a preference makes it a bit like debt, although it is an equity structure, it has a guaranteed payment to that.
In Germany, the favorites get a slightly higher dividend but are otherwise almost entirely the same, except you can’t vote. It is the same as the common. It has the same right to profits as the common to a slightly higher dividend. Why is it trading at a severe discount to the common? Because people are careful.
Jim Gillies: My favorite version of this story, Bill, and Bill know it intimately, but I’m going to throw it away for the BFOFs, it’s back to the time of about 2006, 2005, a few years later Mcdonalds (NYSE: MCD) had spun a little burrito maker named Chipotle (NYSE: CMG).
Jim Mueller: Yeah.
Gilles: We were preparing to recommend, Chipotle had two classes of shares. I don’t remember who, I think the B shares were given to McDonald’s shareholders and then the other shares were split. Now there are the two trading classes and we are getting ready, in the old hidden gems and then the paper products, the American version of the Canadian version that I am running today.
We were preparing to recommend or the co-counselor, a certain William H. Mann III, the co-counselor. We knew what was coming because we were all stuck, of course. We knew it was on lockdown, but I think it was a week before Rule Breakers let go of Chipotle first. Rule Breakers, can’t remember who’s recommended there, but I ditched Chipotle, just common stocks, CMG.
Mann: CMG, it was Rick Munarriz.
Gilles: They came to us at Hidden Gems and said, well, Rule Breakers just recommended this and the teams are siled so we don’t know what the others are recommending and that’s good. But someone let us know that they just launched this one. Do you want to change the ticker to CMG? Bill is like “No, CMG.B is 8% cheaper.” We buy that one, 8% woo-hoo because at the thesis being eventually they’ll be compressed, they’ll be made and this discount exchanged, this discount probably lasted I’ll say at least, when did they merged ’07, ’08?
Mann: This lasted until they merged the shares.
Gilles: But it’s Chipotle. Who did not know Chipotle, you could buy Chipotle 8-10% cheaper just by buying B shares.
Mann: Jim, you’ve been through this well, and I understand that, I can’t even imagine how many times I’ve answered exactly that same question about it. You must have missed something. There must be a difference. Can’t believe these two things are the same and one is cheaper than the other, you must have missed something.
Gilles: What was missing was that one share class had eight votes per share and the other one had one vote per share, except for the cheapest. We got the one with eight votes per share [LAUGHTER].
Mann: Yeah. Exactly.
Gilles: We would have that advantage.
Mann: Yeah. The reason this happened, and I mentioned neglect earlier, but there is another structural reason. I’m trying to think of how tall Chipotle was at the time. It would have been a …
Gilles: He was approaching 10 billion, I think. Oh no, sorry.
Mann: A business under $ 2 billion because she went to Hidden Gems, it was a business under $ 2 billion. It would have entered the Russell 2000. For indexers, they will buy the main share class. If you are the clue, the clues, the clues, what do you like the most? Let’s go vote.
Gilles: Indices.
Mueller: Indices.
Mann: Okay. The clues. Thank you.
Gilles: [LAUGHTER]
Mann: In a sweep. The clues don’t pass and don’t assess, and they’ll say, “Hey, these are the same. This is why now companies like Discovery (NASDAQ: DISCA) (NASDAQ: DISC) and Google (NASDAQ: GOOGL) (NASDAQ: GOOG) have their two classes of shares in the S&P 500. There are actually 505 stocks in the S&P 500 because five of them have two voting classes because if they take one out it will be disastrous.
Suzanne Frey, an executive at Alphabet, is a member of the board of directors of The Motley Fool. Bill Mann has no position in any of the stocks mentioned. Jim gillies owns Chipotle Mexican Grill. Jim Mueller, CFA owns Alphabet (A shares), Alphabet (C shares) and Chipotle Mexican Grill. The Motley Fool owns and recommends Alphabet (A-shares), Alphabet (C-shares), Chipotle Mexican Grill and Volkswagen AG. The Motley Fool recommends Discovery (parts C). The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.