Autthor: ajalper
MOLX is trading at a 21% premium to MOLXA. Both shares represent equivalent equity in Molex with differnt voting rights. The 21% premium is significantly higher that the 5 year average spread of 12%. It is likely the the spread will drop 3-5% in the next 3 months. Depending on your leverage could represent a low risk 20-60% annualized return on investment. Also for those looking to invest long in Molex, might consider purchasing the non-voting shares as they have a much greater upside potential.
Molex is traded on the NASDAQ Global Select Market (MOLX and MOLXA) in the United States and on the London Stock Exchange. The Company’s voting common stock (MOLX) is included in the S&P 500 Index.
I am currently short MOLX and long MOLXA.
Thanks for posting. Why do you think the spread is so big, and why/when do you expect it to close?
For share class pairs, I look at several factors to determine what constitutes a significant spread: analysis of historic ratio graph (I will try to post the chart), relative volume, dividends, availability of short shares, borrowing costs, bid/ask spreads, options, voting rights, margin requirements, corporate actions, general market volatility. 24% is what I have assigned this pair as the extreme end of a probable spread. 21% for me was a comfortable entry point. Since I made that call, the spread closed to below 18% and is now at 18.7%. I have already taken some profit and hope that it closes some more.
There is no one factor that would cause the spread to close. The ex-dividend date may help, but not such a big dividend to inspire a hedge fund to arbitrage just for the percentage difference in the dividend. The larger the spread, the more institutional investors see the cheaper shares as a superior investment, and more likely to show up on a stock screen. The fact that the voting shares are at a higher premium also means that insiders believe that the company is worth more than the general public. The stock has received bad press about fraudulent loans out of their Japan operations and management might judge this to have minimal effect on their earnings.
The beauty of having a neutral position is that you don’t have to guess whether management is right, just that the pair ratio eventually reverts to mean.
To be transparent, one motivation of leaving this post is to bring other investors and arbitrageurs to the opportunity so that it would close faster. So far it has moved in the right direction since my post, but I cannot prove that it has an effect.
This is an interesting idea. Have you looked at the long-term history of this pair? For 433 trading days from 12/3/99 to 89/28/01 the spread was over 21% and in fact averaged 34% (peaking at 51%). I’ve just begun to take a look so don’t know what caused this, but it would suggest caution.
Agreed. Caution is advised. Share class arbitrage is not for everyone, and there are some inherent risks. Some of the risks can be mitigated through proper cash management and scaling your position in relationship to the risk. It is important to have a strategy that includes the worst case scenario.
Molx/Molxa is trading at a 21% premium again. This has a high probability of reverting to 17-18% over the next 2 months.