Don’t Buy the Wrong Volkswagen
Mixture of indiscriminate share buying and hedge-fund short covering has driven a wedge between virtually identical Volkswagen securities
If you find two almost identical Volkswagens on a dealer lot and one costs 25% less than the other, it should be obvious that you are better off buying the cheaper one. A surprising number of investors seem to be forgetting that the same logic applies to the stock market.
A gap or spread has opened up between the price of Volkswagen AG’s ordinary shares (VOW), now at €299—equivalent to around $354—and its preference shares (VOW3), at €225. The latter aren’t conventional, debtlike preference shares; they are identical to the ordinary shares except that they don’t carry voting rights. In the U.S., there would be two different share classes.
Infamously, the spread last ballooned in 2008, when Porsche SE tried to take over VW. That saga, by way of a short squeeze that briefly made VW the world’s most valuable company, ended with VW taking over Porsche’s car-making operation, Porsche AG, leaving behind an investment company, Porsche SE (PAH3), with roughly 53% of VW’s ordinary shares and lots of lawsuits. Since that drama, VW’s ordinary and preference shares have rarely traded out of line.
Porsche SE isn’t a suspect this time round. The company says its stake in VW hasn’t changed in recent weeks, and it is hard to see why it would risk more legal challenges.
Instead, brokers are pointing the finger at inexperienced U.S. investors. They appear to be buying VW ordinary shares without realizing the confusingly named preference shares offer the same for less. Trading volumes of American depositary receipts that track VW’s ordinary shares (VWAGY) have surged, as have Google search volumes for the VWAGY ticker.
Like General Motors, VW has positioned itself as the incumbent car maker to rival Tesla. Particularly since a “Power Day” last week that echoed Elon Musk’s September “Battery Day,” the message seems to be getting through to the kind of individual stock pickers who are also buying U.S. and Chinese electric-vehicle startups.
Another reason VW’s stock has become popular is the potential spinoff value of Porsche AG. Manager Magazin reported in February that VW was considering a minority initial public offering of the sports-car maker, which is by far its most profitable division, to raise funds for its electric push. A deal would help close the gap between VW’s stock-market valuation and bankers’ “sum-of-the-parts” calculations of what its individual parts could be worth.
Strong demand for the ordinary shares has come up against limited supply. In addition to the controlling stake held by Porsche SE, there is a 20% stake owned by the German state of Lower Saxony, and a 17% stake owned by the Qatar Investment Authority. That leaves a free float of about 10% with which the ADR managers can cover their exposure.
In an echo of 2008, a hedge-fund short squeeze may be exacerbating the moves. A popular arbitrage strategy involves buying shares in the Porsche SE investment company and selling short the VW ordinary shares that theoretically underlie them. The trade has unraveled with the ordinary-share rally, likely forcing some investors to run for cover.
The crazy thing about U.S. investors’ interest in the ordinary shares is that ADRs tracking the cheaper, more liquid preference shares (VWAPY) also exist. There may be good reasons to hold Volkswagen, but there aren’t good reasons to hold its ordinary shares or the associated ADRs.