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