A Poor Man’s Arbitrage: Toronto-Dominion Bank (TD), Marathon Oil Corporation (MRO) and More

Page 1 of 2

In discount Direct Stock Purchase Plan (DSPP) investing, one advanced technique investors can utilize to achieve profits, is investing in a DSPP with optional purchase discounts in order to exploit the difference in share price between the purchase discount and the current market price. For example, Pembina Pipeline Corp (NYSE:PBA), an energy transfer company operating in Canada, with a mediocre margin of 7.17%, but a manageable beta of 0.68, offers an optional purchase discount of 5%. Investing in companies like PBA, although perhaps a subpar example in its sub sector, may in fact prove useful in achieving a type of arbitrage more readily accessible to retail investors.

Toronto-Dominion Bank (USA) (NYSE:TD)So, let’s look at another company offering a discount purchase option. The Toronto-Dominion Bank (USA) (NYSE:TD) offers a 0-5% discount on direct purchases. TD Bank is a Canadian bank, which largely avoided the sub-prime mortgage crisis so prevalent just a few years ago in the U.S. It currently sports a 3.7% dividend, but like most financial institutions maintains a roughly 1:1 ratio of total debt to total assets, which is more or less expected in its sector, so no problem there. However, TD is in relatively good financial shape compared to its American counterparts and was in fact able to acquire U.S.-based Commerce Bank in 2007 due to favorable Canadian economic factors, such a good currency exchange rate and better domestic economy, which had not been nearly as adversely affected by the global financial meltdown of 2008-2009.

Third, we’ll examine Marathon Oil Corporation (NYSE:MRO). While, MRO is not one of the leaders among integrated oil and natural gas companies, it nonetheless offers a 0-5% direct purchase discount. That being said, although MRO is still an emerging player in the energy sector, it sports a healthy 11.85% margin. Also, its total debt is less than half of its total assets. However, it possesses a 1.5 beta, which may too risky to perform a poor man’s arbitrage (see below-written explanation) as wild swings in the share price, may negate any potential short-term capital gains.

Therefore, in order to perform the (above-mentioned) type of arbitrage, an investor would purchase, typically a large amount of shares, wait until settlement, and then quickly sell their recently acquired lot and pocket the difference between the current market price and the discounted 5% purchase price. Making money on this kind of spread has been referred, by many DSPP investors as a ”Poor Man’s Arbitrage (search keyword: poor).”

In terms of risk to retail investors, the main danger with this investment strategy is if the stock loses more than 5% in value, any (potential) profits would be negated. Perhaps an easy way to mitigate this risk is purchase a stock with a low beta and avoid buying around earnings calls. By doing so, investors seeking arbitrage can help mitigate potential wild swings in the overall share price.

While this kind of investment strategy is not without risk and despite investors despite are likely to profit from it, I think the poor man’s arbitrage should be avoided. This is because within DSPP plans with discounted optional purchases, should the company offering the plan observe unusually high volume in the stock, it will either end the DSPP or suspend it indefinitely. Therefore, arbitrage by even small players will often ruin opportunities for the long-term “buy” and “hold” investor which is both unfortunate and completely avoidable by making well-reasoned, ethical (investing) decisions.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Largest Pharmaceutical Companies In the World

The 10 Most Expensive Android Apps

The 9 Most Expensive Designer Bags in the World

The 7 Most Expensive Real Estate in the World

The 10 Most Expensive eBay Items Ever Sold

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!