Monday, November 1, 2010

"A Secret Route to Banking's Potential Riches" (BAC; HIG; JPM; WFC)

From Barron's:

A way for aggressive investors to play the out-of-favor banking sector is through stock warrants given to the Treasury under TARP.
ONE LITTLE-KNOWN WAY TO play a rally in the depressed banking sector is via warrants on the shares of such companies as JPMorgan Chase (JPM), Wells Fargo (WFC) and Bank of America (BAC) that originally were given to the Treasury in conjunction with the government's injection of Troubled Asset Relief Program (TARP) money into the financial sector during 2008 and 2009

When the Treasury pumped TARP funds into financial companies to bolster capital and boost confidence, it wanted taxpayers to benefit from the stocks' gains if the sector recovered and demanded warrants from the participants. Warrants are long-term call options that give investors the right to buy a stock for a fixed price for a period of time. If the stock increases, the warrants tend to rise and if the stock drops, so usually does the warrant. As the companies began to repay their TARP funds last year, the Treasury could sell the warrants.

Some companies, like Goldman Sachs and Morgan Stanley, repurchased their warrants directly from Uncle Sam, while the Treasury opted to auction publicly the warrants for JPMorgan, Bank of America and others after they couldn't agree on private repurchases. While TARP may be anathema in much of America, the program may make $25 billion for Uncle Sam and one reason is the warrant sales, which have netted over $8 billion for the Treasury so far.
"This has been a volatile sector that has underperformed the market since the early summer," says Mark Pawlak, a strategist with Keefe Bruyette and Woods. "This gives investors a leveraged way to play an out-of-favor group."

The New York Stock Exchange-traded warrants, which mature in 2018 and 2019, generally fetch a fraction of the price of the underlying common, meaning buyers can get more equity exposure. But they are better suited to more aggressive investors because of the inherent leverage and the problem of time decay. The price will erode as the maturity date approaches. More conservative investors probably should stick with the stocks. In many cases, the warrants have held up better than the stocks since they were sold, which has diminished their appeal....MORE

Warranting Attention

In many cases, a bank's warrants have outperformed its common stock price since the warrants were issued. That can make them less appealing to new investors.
Co. Warrant/ Ticker Expiration
-Change In Price
Warrant* Stock**
JPMorgan /JPM/WS Oct. 2018$42.42$12.56$37.51 16.8% -8.4%
BofA /BAC/WS/A Jan. 201913.306.0011.53-28.1-29.7
BofA /BAC/WS/B Oct. 201830.792.0611.53-19.2-29.7
Wells Fargo /WFC/WS Oct. 201834.018.1525.94 5.8-13.8
Capital One /COF/WS Nov. 201842.1313.0637.92 11.1 0.0
Comerica /CMA/WS Nov. 201829.4012.2935.70-23.2-11.4
PNC Fincl /PNC/WS Dec. 201867.3311.4053.64-40.6-20.2
Hartford Fincl /HIG/WS Jun. 20199.7915.8424.0415.6 7.7
Lincoln Natl /LNC/WS July 201910.9216.7725.01 1.0 1.8
*Since issue. **Since warrant issue. Sources: U.S. Treasury, Bloomberg