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Adding to Bank of America warrants positon

June 15, 2011

True to my word (see Gerard’s question on my earlier post), I have increased my position in Bank of America A warrants by about 50% at around the $5.50 level. I may increase my position still further if the warrant price falls to $5 or below. My outlook for the money center banks hasn’t changed, even if Mr. Market has become less enthusiastic. Interest rates are still low and the banks are cranking out money on their lending spread. The mortgage issue hasn’t gone away; I think it will take years to work out, but I do think it will be worked out in the end without too much pain. In the meantime, I don’t see BAC being allowed to fail, although that, too, could happen. I would be much more leery of holding an interest in BAC if it were a European bank with a large exposure to Greek bonds.

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4 Comments
  1. I’m a big fan of the TARP warrants, but at $10.49 on the BAC common, I think the common is a better buy. The warrants protect you only if the stock goes below $5.10. On the upside, they don’t earn a superior return to the common until the stock gets above $27.35.

  2. Derek,
    The way I look at it, the BAC A warrants provide a bit of a cushion on the downside, i.e. of the common gets really decimated, while on the upside, if all plays out nicely, the common should trades back to the $30-$40 range by 2018/2019 with the warrants providing a somewhat better return. It’s just a bit of leverage if my scenario works out. But you’re right that around this level the common is beginning to be a bit attractive. However, if I’d held the common since last fall, I would be down quite a bit more than I am currently (with all the emotional baggage that brings) so I’m happy to continue my warrant strategy.

    Thanks for the comment

    Jay

  3. Stan permalink

    Happy Holidays,

    We are some ways down the road since your original post on the topic, and I am doing more work around the BAC-WTA warrants and their relative value vs. the WFT and JPM securities. The former seem significantly cheaper in terms of implied volatility and following your math on book value accretion for a WFC, which is arguable a more stable franchise, there seems to be a lower chance of a capital loss. Am curious if you’ve re-examined the field since your original investment?

    Understand that there was a “gut” element to the original thesis, and looking at the BAC equity today, one cant help think that surely at least 25% of the book has to be there, regardless of the mess on the b.s. so sympathise with that and am long BAC.

    Anyway, would be curious to hear your thoughts on the warrants, or read a refresh on the topic. Appreciate all the time you put in so the rest of us have something to chew on.

    Stan

    • Stan,

      Thanks for commenting. Happy New Year back to you!

      I’m still a fan of the BAC warrants, perhaps even more so now that BAC is the WORST performing bank of the money center group (well, maybe Citi is giving them a run for their money). I try not to get fixated on the present. I’ve been adding to my BAC.WS.A position all the way down; Last add was at the $2.50 level. The warrants still have 7 years to run, and a lot can happen in 7 years. Just think where BAC shares traded a year ago! Was anyone predicting they would fall another 50%? I was, as usual, early to the BAC warrant party, but at today’s levels I think they present a really extraordinary value. I must admit I’ve also been nibbling a bit at the Citigroup warrants as well which seem to be driven more by sentiment than any reasonable valuation model; they can swing 10-20% in a day!

      Sorry my answer isn’t more analytical on this one. It remains a ‘gut’ investment of mine.

      Let’s look back in another year and see where we are. In the meantime.. profitable investing and …patience!

      Best
      Jay

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