Discovery Communications, a Dual Class Share Arbitrage Play



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Our Stock Idea for today is Discovery Communications and it is an arbitrage play.

If you're not familiar with arbitrage, it is essentially a maneovre where you play the same equity in two directions when the market is being illogical.

In this situation, we are dealing with two classes of shares on the NASDAQ DISCK and DISCA.

 

There is a substantial price difference between these two shares. However, they are essentially the same. Each represents 1 share of the Discovery Communications Network (a company that owns multiple TV stations). The only difference between the two is DISCA is higher volume and is a voting rights share; wheras DISCK is lower volume and non-voting.

These Factors would definately indicate a bit of a haircut to the price of DISCK, but not the 15% difference that they are currently trading at.

How to play this

Playing this is very simple, you go long DISCK and short DISCA based on the thesis that the 15% share difference will soon close. You will not make more than 15% most likely, so this isn't a multibagger trade. However, it is reasoned to be a very safe gain as the difference between these two equities should soon close.

You may wish to consider weighting the trade at a ratio of 1.15 to 1 in favor of DISCK so you dont have mathematics working against you.

Please read our disclaimer

Disclosure: Long DISCK and Short DISCA

Credit for idea: Above Average Odds Investing