Crawford A/B Shares crd.a/crd.b
January 02, 2009 - 10:33am EST by
dman976
2009 2010
Price: 6.66 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 750 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

I am dealing with one of the most befuddling positions of my career, a position long CRD.A, short CRD.B. I am recommending you do the same as the only risk is purely quotational (and if you get squeezed down the line). I believe this is substantively different from the earlier short recommendation of CRD. B as this recommends a long/short position with no view toward the fundamentals of the company, and the spread has blow out even more since. I put on the position I believe with an initial spread of about $5 per share, and it has now blown out to over $8 per share. CRD.A is trading at $6.66 while CRD.B is at $14.7. They have the same economic interest in the company, but the B shares have the vote. The B shares trade about 2.5x the volume of the A shares. This relationship is absolutely crazy on any evaluation. This is WAY beyond historic spreads for the two securities. Just a few months ago the spread was about $1.

In looking at how on Earth this could happen, I have come to a couple of conclusions, each of which are temporary:

  1. The company reported good earnings growth last quarter – as a result the IBD crowd has latched onto this stock as a CANSLIM (high growth, low valuation) stock – a number of quant guys and program traders have shown up as Class B shareholders and they appear to be operating in the B shares. I have seen some technical newsletters recommending the B shares due to the “strength” (you know, the buy because it’s going up strategy) – they don’t even reference the A shares. Note that a previous, well done write up here recommended shorting the B shares outright due to its valuation and overstated growth outlook.
  2. The Chairman made a foolish decision to publicly announce he was looking to sell 800,000 A shares. This has scared people away from buying.

I called the Company and had a brief conversation where I asked their opinion on the spread. The person I spoke with was apologetic and said they had been getting numerous calls from irate Class A shareholders. It wouldn’t surprise me if they tried to address this in the future.

Catalyst

rationality and reason return
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    Description

    I am dealing with one of the most befuddling positions of my career, a position long CRD.A, short CRD.B. I am recommending you do the same as the only risk is purely quotational (and if you get squeezed down the line). I believe this is substantively different from the earlier short recommendation of CRD. B as this recommends a long/short position with no view toward the fundamentals of the company, and the spread has blow out even more since. I put on the position I believe with an initial spread of about $5 per share, and it has now blown out to over $8 per share. CRD.A is trading at $6.66 while CRD.B is at $14.7. They have the same economic interest in the company, but the B shares have the vote. The B shares trade about 2.5x the volume of the A shares. This relationship is absolutely crazy on any evaluation. This is WAY beyond historic spreads for the two securities. Just a few months ago the spread was about $1.

    In looking at how on Earth this could happen, I have come to a couple of conclusions, each of which are temporary:

    1. The company reported good earnings growth last quarter – as a result the IBD crowd has latched onto this stock as a CANSLIM (high growth, low valuation) stock – a number of quant guys and program traders have shown up as Class B shareholders and they appear to be operating in the B shares. I have seen some technical newsletters recommending the B shares due to the “strength” (you know, the buy because it’s going up strategy) – they don’t even reference the A shares. Note that a previous, well done write up here recommended shorting the B shares outright due to its valuation and overstated growth outlook.
    2. The Chairman made a foolish decision to publicly announce he was looking to sell 800,000 A shares. This has scared people away from buying.

    I called the Company and had a brief conversation where I asked their opinion on the spread. The person I spoke with was apologetic and said they had been getting numerous calls from irate Class A shareholders. It wouldn’t surprise me if they tried to address this in the future.

    Catalyst

    rationality and reason return

    Messages


    SubjectRE: agree
    Entry01/02/2009 02:24 PM
    Membertyler939
    I agree that, economically, a price difference this large makes no sense. However, the A shares carry no votes, and Jesse Crawford owns 52% of the B shares, so he controls any shareholder vote. Since Crawford owns more B shares (52%; 58% if you add Lind Crawford's 6%) than A shares (45%), what's his incentive to support a collapse of the share classes?

    SubjectCRD A/B
    Entry01/02/2009 09:18 PM
    Memberdadande929
    Vlaue ALWAYS wins out. I have seen it with Chipolte, and O have done BELA & B till they came togther and yars ago with GOSHA and GOSB. Always it works!

    SubjectTheory vs. practice
    Entry01/03/2009 08:01 AM
    Memberzzz007
    dadande, Value may always win in theory, but the mechanics of the marketplace aren't always so kind. Short positions can get called in. There were funds that thought they couldn't lose on the VOW GR trade that are now out of business as a result. I'm not saying this isn't a good trade, just stressing that there are no absolutes in this business. zzz

    SubjectRE: CRD Dumbfounded
    Entry03/30/2009 11:43 AM
    Membergocanucks97

    any thoughts about covering the short and going long only on the A shares, betting on the convergence will be upward biased?


    SubjectRE: unwound
    Entry05/11/2009 03:50 PM
    Membergocanucks97

    thanks a lot for the great idea. i unwound the trade at a bit higher spread, but no complaints.

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