Background: Chipotle Mexican Grill (I love the burritto) trades on the NYSE with multiple class of shares- Class A & B. They just differ in voting rights but give you the ownership of the CMG. Due to liquidity availabilty and institutional preference, one of the two classes will trade at a discount to the other. However the discount is not significant. This is not very unusual - It exists in stocks of a lot of companies, News Corp, Comcast, Berkshire to name a few.
What stands out for Chipotle is the magnitude of discount. Class A share currently trades at $83.85 while Class B share trades at $69.40. Its a huge difference. WSJ ran a piece (subscription required) on this yesterday explaining the difference and how to take advantage of this.
You could simple go long Class B share and short Class A share and wait for gap to reduce. Chipotle is considering what to do with Class B shares and continues to buy back class B shares.
If you like Chipotle as a stock, just go and buy Class B share. There is honestly no reason to buy Class A share unless you are an institution or manage large sums money. Daily volume for class B is around 166k shares while for class A share is 800k shares.
As we can see the current spread is at historic highs at around $14.50 while only a few months ago the spread was as low as $2. Irrespective of what you think about CMG, its a trade worth taking. Long CMG and short CMG.B.
Kudos to WSJ for the idea!
Note: CMG.B has moved 3% today while CMG has only moved 1%. My guess it is due to other WSJ readers like me. I would not put entire trade today itself but put a portion today and wait for a few days when people who put the trade today reverse their position, increasing the spread.
This entry was posted
on 2009/05/05
at Tuesday, May 05, 2009
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Arbitrage,
Chipotle,
WSJ
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