Lennar Share Class Trade Mentioned In Barrons
THE HOMEBUILDING STOCKS MIGHT BE responsible for more broken keyboards and shouted curses in short sellers' offices than any other group of stocks.
For more than two years the term "housing bubble" has been the two-word bearish thesis on these stocks, which tend to feature fat short-interest levels and just as many momentum investors happy to take the other side. Over those two years, the Philadelphia Housing Index has risen about 125%.
The stocks have recently suffered a minor setback. And an influential bullish analyst, Stephen Kim of Smith Barney, downgraded the group to a neutral stance this month. The verdict is hardly in, and the skeptics can't declare victory until new-home demand enters a deteriorating trend, or Treasury yields continue last week's steep ascent.
But a popular arbitrage idea -- one that so far hasn't been profitable -- could act as a sort of stealth, safer short position in the housing group. The trade involves playing the spread in the two share classes of homebuilder Lennar.
Lennar's share classes are identical except that the A shares have no voting rights, which are only available in the B shares. Yet the A trades at about a $5 per share premium despite their non-voting status, or close to a 10% premium at recent prices. In theory, voting shares should be worth a bit more, but the A shares are much more liquid and are a component in the S&P 400 Mid Cap index.
Since it was described here in late 2003 (The Trader, Nov. 3, 2003), the spread has stayed static, meaning it's been dead money for arbs.
Yet Jonathan Blumberg of Ronin Capital thinks the trade is now worthwhile. He notes that the spread tends to widen when the stock rises, and contracts in downturns. This way, shorting the A and owning the B to capture the spread would likely be profitable if the stock were to collapse with the homebuilder group. The other way the spread could narrow, or be eliminated, would be if the company elected to eliminate the separate classes. Insiders generally own the lower-priced B shares.
Any braver housing bears, of course, could always short just a bit more B shares than the A they own. At the risk of broken keyboards, of course.
For more than two years the term "housing bubble" has been the two-word bearish thesis on these stocks, which tend to feature fat short-interest levels and just as many momentum investors happy to take the other side. Over those two years, the Philadelphia Housing Index has risen about 125%.
The stocks have recently suffered a minor setback. And an influential bullish analyst, Stephen Kim of Smith Barney, downgraded the group to a neutral stance this month. The verdict is hardly in, and the skeptics can't declare victory until new-home demand enters a deteriorating trend, or Treasury yields continue last week's steep ascent.
But a popular arbitrage idea -- one that so far hasn't been profitable -- could act as a sort of stealth, safer short position in the housing group. The trade involves playing the spread in the two share classes of homebuilder Lennar.
Lennar's share classes are identical except that the A shares have no voting rights, which are only available in the B shares. Yet the A trades at about a $5 per share premium despite their non-voting status, or close to a 10% premium at recent prices. In theory, voting shares should be worth a bit more, but the A shares are much more liquid and are a component in the S&P 400 Mid Cap index.
Since it was described here in late 2003 (The Trader, Nov. 3, 2003), the spread has stayed static, meaning it's been dead money for arbs.
Yet Jonathan Blumberg of Ronin Capital thinks the trade is now worthwhile. He notes that the spread tends to widen when the stock rises, and contracts in downturns. This way, shorting the A and owning the B to capture the spread would likely be profitable if the stock were to collapse with the homebuilder group. The other way the spread could narrow, or be eliminated, would be if the company elected to eliminate the separate classes. Insiders generally own the lower-priced B shares.
Any braver housing bears, of course, could always short just a bit more B shares than the A they own. At the risk of broken keyboards, of course.
