NRCIB: the business has grown but the share price has stayed the same

(*Disclosure:  Long NRCIB.)

Idea type:  GARP and/or share class arbitrage

Three years ago, I wrote about National Research Corporation, an obscure and illiquid company with a market cap of half a billion.  Since then, the company has continued to grow (around 11-14%/year) while the share price has stayed the same.  According to the 2015 10-K, EPS for class B shares was $2.52 so the GAAP P/E is around 14.  However, due to this company’s unusual structure, GAAP earnings overstate the true P/E.

The arbitrage trade might also be interesting since the spread between the B and A shares should be somewhere around 1:1 to 6:1 or higher (arguably close to 6:1), but is currently 2.16:1.

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NRCIB: Closed my position for silly reasons

  1. The fundamentals of NRCIB have not changed much since my original writeup.
  2. The price has gone up by roughly a third.  I have decided to take my profits and to reinvest them elsewhere.
  3. It bugs me a lot that the borrow on NRCIB is around 4% and is much higher than NRCIA.  (This bugs me mainly because I cannot lend my shares out.)  It would make more sense if the cost of borrow was the other way around as I believe that the price ratio between NRCIB and NRCIA should be roughly 6:1.  The current ratio is around 2.7:1  ($39.29/$14.73).  The arbitrage trade is to short NRCIA and to go long NRCIB.

*Disclosure: No position in NRCIB or NRCIA.  I never shorted NRCIA because I dislike arbitrage trades that involve risk.

National Research Corporation (NRCIA/B)

National Research corporate does surveys for healthcare-related organizations.  The operating business has grown around 14%/year over the last decade.  Its CEO is obviously a Warren Buffett fan and (in my opinion) has higher integrity than Buffett.

Recently, National Research has performed a recapitalization that has created an A and B share structure.  There is some uncertainty as to the relative economic interest between the two share classes.  The B shares should be worth anywhere from 6X to 1X that of the A shares if voting rights and illiquidity are ignored.  This is a huge range.  Because of the uncertainty over the relative value of the two share classes, there are two different possible trades:

  1. Arbitrage.  Go long the B shares and short the A shares.  One could make the argument that the B shares have 6 times the economic interest of the A shares.  On top of that, the B shares have higher voting power so they should trade at a slightly premium (though in practice it could trade at a discount due to illiquidity).
  2. Go long the B shares.  National Research is a well-managed company run by a CEO with unusual integrity.

*Disclosure:  Long NRCIB, no position in NRCIA.

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