LENNAR CORP LEN.B
October 02, 2012 - 1:30pm EST by
dman976
2012 2013
Price: 27.08 EPS $0.00 $0.00
Shares Out. (in M): 188 P/E 0.0x 0.0x
Market Cap (in $M): 6,369 P/FCF 0.0x 0.0x
Net Debt (in $M): 3,328 EBIT 0 0
TEV ($): 10,298 TEV/EBIT 0.0x 0.0x

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  • Homebuilder
  • Capital Structure Arbitrage
  • Dual class

Description

Disconnects across the capital structure can be interesting but they usually don’t reach this level of silliness. I recommend you purchase LEN.B and short LEN in equal dollar amounts (you will own more LEN.B shares than you are short LEN). Occasionally two classes of common shares in the same company will trade publicly. Each share may have different rights in terms of dividends, voting, etc. In this case the shares with more economic value actually trade at a hefty discount:

 

 

 

 

LTM

Voting

Dividend

Liquidate

 

Price

Dividend Yld

Dividend

Rights

Rights

Pref

LEN

$34.97

0.48%

$0.160

1 Vote

Y/Equal

0

LEN.B

$26.71

0.61%

$0.160

10 Votes

Y/Equal

0

 

While you have an understandable liquidity discount (LEN.B doesn’t trade as much), the spread between the shares is crazy relative to historic levels. The spread at over $8 is currently the widest on record and over three standard deviations away from historic levels. The previous all-time high spread (on another spike in the relationship) was $5. The spread has averaged about $3 over the past five years. By shorting the same dollar value of LEN as you own in LEN.B you also get a positive dividend carry.

Alternatively, if you’re interested in buying Lennar (LEN) because you are expecting a significant housing rebound or shorting it because you think it is overvalued, this trade may capture your interest.  

If you are bullish on Lennar, buy LEN.B.  It has more economic value and trades at a huge discount. Liquidity is otherwise tighter with these shares, but if you are in it for the long haul, and can stand the decreased level of liquidity, then consider buying LEN.B over LEN.   

Conversely, if you think LEN is overvalued and want to short it, think about shorting LEN while hedging with a long position in LEN.B.  but short the same number of shares you buy rather than do it on a dollar for dollar basis. You will be short more dollars in LEN than you are long dollars of LEN.B so your net position is short LEN.  Lennar and other homebuilders, have been on a tear this year.  LEN is up close to 200% YTD.  The price chart is impressively bullish.  If you want to short this stock because you believe it is rich and your outlook on the homebuilding industry is tepid, but at the same time, you want to mitigate the risk of fading a locomotive, you might be interested in this trade. 

I have recommended doing these trades a couple of times on these boards – they both worked out very well and I don’t see why this one will be different.

Risk is obviously a short squeeze. The current borrow rate is almost zero which indicates a lack of tightness in the borrow. However you never know.

As always, we have a position in these shares and may buy, sell or cover our positions at any time without notification. Please do your own due diligence.

 

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

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    Description

    Disconnects across the capital structure can be interesting but they usually don’t reach this level of silliness. I recommend you purchase LEN.B and short LEN in equal dollar amounts (you will own more LEN.B shares than you are short LEN). Occasionally two classes of common shares in the same company will trade publicly. Each share may have different rights in terms of dividends, voting, etc. In this case the shares with more economic value actually trade at a hefty discount:

     

     

     

     

    LTM

    Voting

    Dividend

    Liquidate

     

    Price

    Dividend Yld

    Dividend

    Rights

    Rights

    Pref

    LEN

    $34.97

    0.48%

    $0.160

    1 Vote

    Y/Equal

    0

    LEN.B

    $26.71

    0.61%

    $0.160

    10 Votes

    Y/Equal

    0

     

    While you have an understandable liquidity discount (LEN.B doesn’t trade as much), the spread between the shares is crazy relative to historic levels. The spread at over $8 is currently the widest on record and over three standard deviations away from historic levels. The previous all-time high spread (on another spike in the relationship) was $5. The spread has averaged about $3 over the past five years. By shorting the same dollar value of LEN as you own in LEN.B you also get a positive dividend carry.

    Alternatively, if you’re interested in buying Lennar (LEN) because you are expecting a significant housing rebound or shorting it because you think it is overvalued, this trade may capture your interest.  

    If you are bullish on Lennar, buy LEN.B.  It has more economic value and trades at a huge discount. Liquidity is otherwise tighter with these shares, but if you are in it for the long haul, and can stand the decreased level of liquidity, then consider buying LEN.B over LEN.   

    Conversely, if you think LEN is overvalued and want to short it, think about shorting LEN while hedging with a long position in LEN.B.  but short the same number of shares you buy rather than do it on a dollar for dollar basis. You will be short more dollars in LEN than you are long dollars of LEN.B so your net position is short LEN.  Lennar and other homebuilders, have been on a tear this year.  LEN is up close to 200% YTD.  The price chart is impressively bullish.  If you want to short this stock because you believe it is rich and your outlook on the homebuilding industry is tepid, but at the same time, you want to mitigate the risk of fading a locomotive, you might be interested in this trade. 

    I have recommended doing these trades a couple of times on these boards – they both worked out very well and I don’t see why this one will be different.

    Risk is obviously a short squeeze. The current borrow rate is almost zero which indicates a lack of tightness in the borrow. However you never know.

    As always, we have a position in these shares and may buy, sell or cover our positions at any time without notification. Please do your own due diligence.

     

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

     Sanity returns
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