(*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.
- The fundamentals of NRCIB have not changed much since my original writeup.
- The price has gone up by roughly a third. I have decided to take my profits and to reinvest them elsewhere.
- 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 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:
- 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).
- 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.