jerseyshorejohnny
Well-known member
If it walks like a duck and talks like a duck, then it’s probably a duck. But not if we’re talking about Under Armour ’s different share classes, which have been treated more like swans and ugly ducklings.
Last year, Under Armour (ticker: UA) said that it would split its A shares in two, and create a new class of stock—C shares. The move was seen as an attempt to maintain CEO Kevin Plank’s control of the company regardless of whether he sold stock or issued more shares to pursue an acquisition. The C shares would be just like the A shares, but with one difference: no voting rights.
Investors, however, have made their preference clear. Last week, the C shares traded at a 10% discount to the A shares, compared with a 3% discount in April. The gap between the two stocks’ prices has been as wide as 13%. For fans of the stock, that gap might be an opportunity to profit.
Some discount between share classes is to be expected. After all, voting rights have some value, even if that value is hard to quantify. That should lead theoretically to nonvoting shares trading at a slight discount to voting shares. That’s the case with Alphabet (GOOGL), whose C shares ( GOOG ) trade at a 3% discount to the A shares. Differences in liquidity, which influence the ease with which investors can enter and exit a position, also could lead to one share class trading at a higher price than another. Even the inclusion of one share class in a major index like the Standard & Poor’s 500, and the exclusion of the other, can cause one to be more popular with investors. (Both of Alphabet’s share classes are in the popular benchmark.)
Under Armour’s C shares are tarnished for all three reasons. Some 5.4 million Under Armour A shares change hands on an average day, nearly five times as many as its C shares, while the A shares, too, are part of the S&P 500, giving them a ready source of buyers in the form of index funds, exchange-traded funds, and active managers who are trying to track their benchmark. That suggests the discount in Under Armour’s C shares should be larger than in Alphabet’s. But is it currently large enough?
Probably not, if you’re an arbitrageur—who shorts the expensive shares and buys the cheap ones. Roy Behren, a portfolio manager at Westchester Capital Management, calls the current gap “historically wide but not actionable,” meaning it’s not wide enough to merit a bet that it will narrow.
A second portfolio manager, who prefers to remains anonymous, estimates that the C shares should trade at a discount of between 5% and 10%. Still, without a long trading history to go by, it’s an educated guess. “Does 10% sound that crazy?” he asks. “It isn’t to me.”
Alternately, an individual investor looking to buy shares at a bit of a discount might find the opportunity attractive. University of Notre Dame finance professor Paul Schultz observes that over time, wide gaps—and this would be one—tend to narrow. “If you are considering buying the stock anyway, you could earn a little extra return,” he says.
All of this presumes, of course, that you’re interested in buying Under Armour’s stock. Its shares took a beating last week after the sports-apparel maker reported a profit of $6.34 million during the second quarter, down nearly 60% from the same quarter a year ago. The big drop was driven by the Sports Authority bankruptcy filing, and by a large jump in capital spending, as Under Armour launched new products and built out its online presence.
Under Armour isn’t past these issues yet, acknowledges Cowen analyst John Kernan, who rates the stock Outperform. Yet, Under Armour’s sales grew 28% in the second quarter, to $1 billion. Its profit margin, which fell to 47.7% in the period from 48.4% a year earlier, could improve as spending slows. “They’re spending an enormous amount of money, but the investments will pay off,” says Kernan, a fan of the C shares. “If this gap closes, it gives some downside support.”
Last year, Under Armour (ticker: UA) said that it would split its A shares in two, and create a new class of stock—C shares. The move was seen as an attempt to maintain CEO Kevin Plank’s control of the company regardless of whether he sold stock or issued more shares to pursue an acquisition. The C shares would be just like the A shares, but with one difference: no voting rights.
Investors, however, have made their preference clear. Last week, the C shares traded at a 10% discount to the A shares, compared with a 3% discount in April. The gap between the two stocks’ prices has been as wide as 13%. For fans of the stock, that gap might be an opportunity to profit.
Some discount between share classes is to be expected. After all, voting rights have some value, even if that value is hard to quantify. That should lead theoretically to nonvoting shares trading at a slight discount to voting shares. That’s the case with Alphabet (GOOGL), whose C shares ( GOOG ) trade at a 3% discount to the A shares. Differences in liquidity, which influence the ease with which investors can enter and exit a position, also could lead to one share class trading at a higher price than another. Even the inclusion of one share class in a major index like the Standard & Poor’s 500, and the exclusion of the other, can cause one to be more popular with investors. (Both of Alphabet’s share classes are in the popular benchmark.)
Under Armour’s C shares are tarnished for all three reasons. Some 5.4 million Under Armour A shares change hands on an average day, nearly five times as many as its C shares, while the A shares, too, are part of the S&P 500, giving them a ready source of buyers in the form of index funds, exchange-traded funds, and active managers who are trying to track their benchmark. That suggests the discount in Under Armour’s C shares should be larger than in Alphabet’s. But is it currently large enough?
Probably not, if you’re an arbitrageur—who shorts the expensive shares and buys the cheap ones. Roy Behren, a portfolio manager at Westchester Capital Management, calls the current gap “historically wide but not actionable,” meaning it’s not wide enough to merit a bet that it will narrow.
A second portfolio manager, who prefers to remains anonymous, estimates that the C shares should trade at a discount of between 5% and 10%. Still, without a long trading history to go by, it’s an educated guess. “Does 10% sound that crazy?” he asks. “It isn’t to me.”
Alternately, an individual investor looking to buy shares at a bit of a discount might find the opportunity attractive. University of Notre Dame finance professor Paul Schultz observes that over time, wide gaps—and this would be one—tend to narrow. “If you are considering buying the stock anyway, you could earn a little extra return,” he says.
All of this presumes, of course, that you’re interested in buying Under Armour’s stock. Its shares took a beating last week after the sports-apparel maker reported a profit of $6.34 million during the second quarter, down nearly 60% from the same quarter a year ago. The big drop was driven by the Sports Authority bankruptcy filing, and by a large jump in capital spending, as Under Armour launched new products and built out its online presence.
Under Armour isn’t past these issues yet, acknowledges Cowen analyst John Kernan, who rates the stock Outperform. Yet, Under Armour’s sales grew 28% in the second quarter, to $1 billion. Its profit margin, which fell to 47.7% in the period from 48.4% a year earlier, could improve as spending slows. “They’re spending an enormous amount of money, but the investments will pay off,” says Kernan, a fan of the C shares. “If this gap closes, it gives some downside support.”