How to Get Some Massive Stocks at a Discount

In this segment of “The Morning Show” on Motley Fool Live, recorded on Dec. 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: By and large, you should always buy the cheaper of the two options. I think it’s just people don’t understand what this other one is. We see it so I talked about Volkswagen (OTC: VWAGY) earlier. Volkswagen has a common share and they have a preferred share and in the U.S. and in Canada, preferred share describes something that’s very different and that a preferred actually a little bit like debt, though it is an equity structure, it has a guaranteed payment to it.

In Germany, the preferreds get a slightly higher dividend but are otherwise almost entirely the same except that you cannot vote. It’s the same as the common. It has the same claim on earnings as the common at a slightly higher dividend. Why is it trading at a severe discount to the common? Because people are paying attention.

Jim Gillies: My favorite version of that story, Bill, and Bill knows this one intimately, but I’ll throw it out for the BFOFs is back in the old days of around 2006, 2005, a couple of years after McDonald’s (NYSE: MCD) had spun out some little burrito maker named Chipotle (NYSE: CMG).

Jim Mueller: Yeah.

Gillies: We were gearing up to recommend, Chipotle had two classes of shares. I don’t remember who, I think the B-shares were given to shareholders at McDonald’s, and then the other shares were spun out. Now there’s both trading classes and we’re gearing up, in the old Hidden Gems then the paper products the American facing version of the Canadian version I’m running today.

We were gearing up to recommend or the co-advisor, some guy named William H. Mann III, the co-advisor. We knew what was coming because we were all blocked out, of course. We knew it was locked out, but then about I think it was a week before Rule Breakers dropped Chipotle first. Rule Breakers, I don’t remember who is recommended there but dropped Chipotle, just the common shares, CMG.

Mann: CMG, that was Rick Munarriz.

Gillies: They came to us Hidden Gems and said, well, Rule Breakers just recommended this and the teams are siloed so we don’t know what each other 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 “Nah, CMG.B is 8% cheaper.” We’re buying that one, 8% woo-hoo because at the thesis being eventually they will be compressed, they will be made and that discount traded, that discount probably lasted I’m going to say at least, when did they amalgamate ’07, ’08?

Mann: It lasted until they merged the shares.

Gillies: But it’s Chipotle. Who didn’t know about Chipotle, you could buy Chipotle 8-10% cheaper just by buying the B-shares.

Mann: Jim, you experienced this is well, and I understand this I cannot even imagine how many times I answered this same exact question regarding that. You have to have missed something. There has to be a difference. I cannot believe that these two things are identical and one is cheaper than the other, you have to have missed something.

Gillies: What was missed was that one class of share had eight votes per share and the other one had one vote per share, except the cheaper ones. We were getting was the one that had eight votes per share [LAUGHTER].

Mann: Yeah. Exactly.

Gillies: We would have that advantage.

Mann: Yeah. The reason why this happened, and I mentioned sloppiness earlier, but there is another structural reason. I’m trying to think how big Chipotle would’ve been at that time. It would have been a…

Gillies: It was approaching 10 billion, I think. Oh, no, sorry.

Mann: Sub $2 billion-dollar company because it went to Hidden Gems, it was a sub $2 billion-dollar company. It would’ve gone into the Russell 2000. For indexers, they will buy the primary share class. If you are the index, indices, indexes, what do you like better? Let’s vote.

Gillies: Indices.

Mueller: Indices.

Mann: Okay. The indices. Thank you.

Gillies: [LAUGHTER]

Mann: In a sweep. The indices don’t go through and evaluate, and they’ll say, “Hey, these are the same.” Which is why now companies like Discovery (NASDAQ: DISCA) (NASDAQ: DISCK) and Google (NASDAQ: GOOGL) (NASDAQ: GOOG) have both of their share classes 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 pulled one out it will be disastrous.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. 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 (C shares). The Motley Fool has a disclosure policy.

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