You Might Have Been Buying The Wrong Volkswagen Stock

You Might Have Been Buying The Wrong Volkswagen Stock
Milou Beunk

almost 3 years ago4 mins

Mentioned in story

What’s going on here?

Germany’s Volkswagen, the world’s second-largest carmaker by number of vehicles, made headlines last week as it doubled down on its shift towards electric vehicles (EVs) in a bid to dethrone market leader Tesla. And investors seemed pretty optimistic about its chances, sending the company’s shares to their highest level since 2015.

But there’s more than one way to buy VW’s stock – and they haven’t all made the same gains recently. So here’s the lowdown on what’s been happening – and whether there’s an investment opportunity to be had.

What does this mean?

VW on Tuesday announced plans to build a million EVs this year and six new battery factories en route to becoming the world’s biggest such manufacturer no later than 2025. The news gave the company’s shares a sprinkling of the Tesla magic, with their price at one stage up nearly 50% for the week. But here’s the thing: there are two types of VW shares, and they didn’t move exactly in sync.

Volkswagen’s “ordinary” shares (ticker: VOW in Germany, or VWAGY for the US version) give shareholders voting rights at the company’s annual general meeting. Its “preferred” shares (ticker: VOW3 in Germany, or VWAPY in the US) don’t – but they do get priority in the event VW is unable to pay all its shareholders dividends. Over the past two weeks, the performance of the two has started to diverge: the preferred shares have gained about 15%, while the ordinary shares’ price has risen 30%.

Share price moves of VW’s ordinary and preferred shares in Germany and the US.
Share price moves of VW’s ordinary and preferred shares in Germany and the US (Source: Bloomberg)

That’s got German financial regulators’ attention. The only time this has happened before – albeit on a much larger scale – was in 2008, when VW’s shares suffered a “short squeeze” as a takeover bid from rival automaker Porsche led to hedge funds betting against VW’s stock losing a ton of money. (If this term sounds familiar, that’s because it’s one of the things that went down with GameStop earlier this year.)

Historic VW ordinary share price premium over preferred shares.
Historic VW ordinary share price premium over preferred shares (Source: Bloomberg)

Perhaps counterintuitively, VW’s ordinary shares are traded a whole lot less than its preferred ones. This lack of liquidity is due to the fact that just three shareholders – the Porsche family, Qatar, and the German state of Lower Saxony – own about 90% of them as very long-term investors. The more frequently traded preferred shares are therefore popularly cited for VW’s main share price.

The two share types’ recent divergence, however, may be down to ignorance of this distinction. Small-scale retail investors’ newfound enthusiasm for the 83-year-old carmarker was demonstrated by a spike in VW-related Google searches, Twitter posts, and Reddit threads. But while the preferred stock changed hands with more frequency, levels of trading in VW’s less liquid ordinary shares also surged, particularly among American investors – and with so few of those shares available for sale, their price rose disproportionately.

Now interestingly, there’s a third way you can effectively invest in Volkswagen. The Porsche family, remember, is a major backer of VW’s ordinary shares via their publicly listed investment company (not the same as the Porsche car manufacturer) Porsche Automobil Holding (ticker: PAH3 in Germany, POAHY in the US). In fact, VW’s ordinary shares are the company’s largest holding – but Porsche’s own share price has, like VW’s preferred share price, failed to keep pace with their recent rise.

VW ordinary share price premium over Porsche’s shares
VW ordinary share price premium over Porsche’s shares (Source: Bloomberg)

Why should I care?

Of course, the million-dollar question is: can you personally profit from this? As I see it, the divergence between Volkswagen’s ordinary and preferred shares, as well as the divergence between Volkswagen’s ordinary shares and Porsche’s shares, could narrow in two ways. Either VW’s ordinary shares come down in price, or VW’s preferred shares and Porsche’s shares go up.

Betting on the first outcome is a risky proposition. To do so, you’d have to short VW’s ordinary shares – and their lack of liquidity means you could easily find yourself on the wrong size of a 2008-style (or for GameStop, January-style) short squeeze.

Successfully backing the second bet would likely prove less lucrative, meanwhile. Back in 2008, the main reason VW’s two share types ended up converging again was because the ordinary shares came down in price, not because the preferred shares went up. And the same has already started to happen this time around.

Still, if you find yourself enticed by Volkswagen’s EV strategy and want to invest in the company for the medium-to-long term, then you should certainly be looking at buying the preferred shares. Their liquidity – as well as their present price relative to the ordinary stock – makes them a much more attractive investment opportunity.

While this isn’t the first time investors appear to have got a little confused as to what exactly they’re buying, this story is – more than anything – another reminder to double-check your facts before putting in an investment order.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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