Sometimes Mr. Market Really is Insane
August 8th, 2007 by MarkSometimes Mr. Market really is insane. That’s not hyperbole. I mean it.
Imagine that a company has two classes of stock, which are each worth an identical portion of a the company and its profits. The only difference is that the B shares carry more voting weight than the A shares. Now imagine that the very same vast hordes whose collective “wisdom” creates wikipedia articles for scientifically impossible Rife Machines decide that they’re willing to pay more for the shares with less voting power. Sound ridiculous?
It’s happened, and the name of the company is Chipotle. Last year, when McDonalds spun Chipotle off in an IPO, they only created one class of publicly traded stock, the A shares. In order to retain a majority interest in the company, McDonalds assigned ten times the voting power to the shares it owned and called them B shares. Later,
Then, when McDonald’s sold its remaining interest in October (perhaps because it saw CMG as overvalued?) the B shares came to market. In October, McDonalds sold their remaining interest in Chipotle, and the B shares became publicly traded. As a result, the two types of shares with identical economic power, but the B shares have ten times the voting rights.
Voting rights aren’t that important to a small shareholder, but the B shares should still trade at some premium to the A shares. They don’t. As of today, the A shares were trading about 10% higher than the B shares.
Struggling to figure out what possible rationale people could have for paying more for the shares with less voting power, I decided to check the liquidity of the B shares. Sometimes, stocks are penalized for low liquidity, since it can make trading in and out of them relatively difficult and expensive. According to Google Finance, the shares are trading at a brisk clip of about a million a day.
It’s things like this that make me want to laugh when economists weave an elaborate web of bullshit about how the “efficient market” can’t be beaten by individual investors. As individuals we’re irrational, but acting in groups people are borderline insane. Just look at YouTube comments. Or mullets.
I sold my class A shares in Chipotle stock, replaced them with more powerful class B shares, and made over $400 bucks in the process, even after transaction costs.
08/07/2007 15:03:36 Sold 45 CMG @ 108.27
08/07/2007 15:05:50 Bought 45 CMG.B @ 98.4894
Legal Disclaimer: All of the information in this article is accurate to the best of my knowledge. However, I make no guarantee about the accuracy of anything written above. I’m not responsible for any mis-typings, or any other errors in the information. If you purchase any stock solely because I did, you do so at your own risk.
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August 8th, 2007 at 11:39 am
Interesting. I just started investing recently. Would you telling me how you distinguished between the two classes of stock on your Ameritrade account? I haven’t figured that out yet…
August 8th, 2007 at 12:34 pm
I did pretty much all of my research via Google Finance, but the way to distinguish between the two classes of stock is the ticker. The A shares are CMG, and the B shares are CMG.B.
August 9th, 2007 at 10:34 am
You should read this February 2007 text that explains the reason behind the Chipotle Mexican Grill price “abnormality”, which is more normal than what you think.
Law of One Price: Works for Berkshire, But Not Chipotle Mexican Grill
http://seekingalpha.com/article/28025
August 9th, 2007 at 10:46 am
About the difference between each class of common stock, I also this info on CMG’s website :
Class A common stock has one vote per share and Class B common stock has 10 votes per share, except that for purposes of approving a merger or consolidation, a sale of all or substantially all of Chipotle’s property or a dissolution of Chipotle, shares of Class B common stock have only one vote per share. A full description of voting rights may be found in Chipotle’s most recent Form 10-K, which is available under “SEC Filings”.
I would still buy Class B, but multiple voting rights might disappear when you will really want to use them, as in the case of a merger.
August 9th, 2007 at 1:59 pm
I think the real reasons for the irrational pricing of the B shares are the extreme growth of the company and the relative lack of awareness of the different share classes. A lot of press releases trumpet Chipotle’s stock, but relatively few mention the B shares. Everybody wants a piece of the action, and some aren’t even aware that B shares exist, or that they have greater voting rights.
Berkshire Hathaway, on the other hand, is less hyped, and much better understood. Its share structure has been around for a while, and it’s been discussed thoroughly. When the dust settles, Chipotle’s B shares will almost certainly be higher.
I’m not interested in arbitrage, though. There’s no way to know exactly when the dust will settle.