Friday, November 5, 2010

BAC Warrants - (Huge) Opportunity?

Does anyone else out there believe that the Bank of America (BACP Class A warrants represent a huge opportunity?

Here is the quick and dirty.

The Class A warrants have a strike price of $13.30/share. The warrant expires January 16, 2019, very long dated. These warrants closed today at a price of $7.05/warrant. Each warrant is good for one common share. The strike price is adjusted downward for any dividends above $0.01/share on the BAC common.

Now if I do the math, in order to make a positive return the stock price of Bank of America needs to be above $20.35/share in January 2019 to breakeven. Given that book value is approximately $21.70/share for BAC, this is basically a bet that BAC will trade for the current book value in 2019. Additionally the warrant strike price will be adjusted for dividends above $0.01 between now and then.

Now that is a bet I am more than willing to make.

Today, nobody is willing to purchase BAC, or many other US bank. We could discuss all of the problems with mortgages, loss of revenue due to recent service charge changes, etc. Obviously the problems with mortgages will haunt them for the next couple years, but after that they will do fine. They are a large, profitable bank that is capable of generating a decent ROE, but by purchasing for half of book value you are giving yourself plenty of room for error. Uncle Sam is pumping the liquidity into the system right now, and banks have rallied this past week.

Hats off to Francis Chou for this idea from his semi annual report (link below). He purchased 1,200,000 BAC Class A warrants for $8.54/warrant. Like I mentioned they closed today for $7.05/warrant. I was lucky enough to buy some for much less over the past couple weeks.

Any thoughts?


Best Regards,
Kevin


Disclosure - I own a boat load of these BAC Class A Warrants.

http://www.choufunds.com/pdf/SA10%20pdf.pdf

8 comments:

  1. This is a beautiful find, but I wonder about the timing. BOFA has horrific writeoffs in front of it, and I don't think that BOFA's liability to mortgage insurance companies for lawsuits for failure to conduct due diligence on loans is reflected in the stock price. I would wait for the second coming of March 2009 to visit BOFA before buying the warrants.

    ReplyDelete
  2. You would have to define horrific writeoffs. Mortgages? They have been releasing loan loss reserves in last two quarters.

    As for the lawsuits, I personally don't think they have any merit. It was the investors in mortgage back securities that should have conducted their due diligence on the loan book prior to purchasing.

    BAC sells at 1/2 of book value. The market has already written off 50% of the value company. BAC would have to have significant losses for the next five year to justify the current valuation. They should be able to earn their way out of any problems from here. Uncle Sam also has their back.

    Like I said nobody will touch this sector, that is what makes the return so great.

    Thanks,
    Kevin

    ReplyDelete
  3. Hi! I am interested in these warrants, however as you know they are now trading at $2.90 each so you are at a big loss. What do you think now with all this hindsight? Do you still think the stock with be worth it. What about at $2.90?

    ReplyDelete
  4. Hi Hailey,

    I purchased some more warrants in Q3 for around $2.70 so that should answer your question.

    Obviously if I new the future I would have waited till today to make my purchases.

    Here is a question for you, if the warrants would have gone up would you have thought they were a better buy? I hope not.

    The company sells for less than half of tangible book value and a third of book. If the company can earn 10% on equity, that will give you a 20% return on investment on day 1.

    Obviously the company has some issues and they are working through them. Tier 1 common equity should be near 9% now with the latest asset sales.

    Regards,
    Kevin

    ReplyDelete
  5. Nice, I think you can make some/a lot of $$$ there. I missed the warrant deals but get into 2014 call option trade when it's $5.

    ReplyDelete
  6. Hey thanks for the writeup. Fellow Canadian here and I'm wondering how you trade these warrants? Are they listed? Do they have symbols? I'm with TDWaterhouse and I have options trading privliges. Are these traded as options? Thanks!

    ReplyDelete
  7. You trade them the same as any equity. Type in BAC.WS.A and select US exchange. The trade on the NYSE. No need for option privilages as far as I know.

    Regards,
    Kevin

    ReplyDelete
    Replies
    1. You are correct and I thank you.

      Delete