Investors who invested in warrants of Bank of America (
) were rewarded recently: The price has soared 20.5% from low to
high in less than a month, to trade for $4.58 on Friday. News
that Citigroup (
) would lay off 11,000 employees, or roughly 4% of its workforce,
pushed that bank's stock up 6 percent, and affected other banks
as well. Bank of America, up 91% year to date, rose about 8%
since the layoff news was announced on Wednesday.
The layoffs signal to investors that Citigroup's new CEO, Michael
Corbat, who replaced Vikram Pandit in October, is willing to trim
expenses and increase efficiency, which could mean higher
profits. Citi's revenue has declined for the last three quarters,
and net income has yet to meet pre-crisis levels. Meanwhile, its
stock has been essentially flat for the past two years.
Other banks' stock rose in tandem on belief that those banks may
be willing to make similar cost-cutting moves. Fox Business
Network's Charlie Gasparino reported that other banks are in fact
planning year-end layoffs.
There are two types of Bank of America Warrants. The first, Class
A Warrants, were issued in January 2009 as part of the U.S.
Treasury bailout, expire on Jan. 19, 2019, and give holders the
right to buy shares at a $13.30 strike price. The Class B
Warrants expire on Oct. 29, 2018, and have a strike price of
Several gurus have been holding Bank of America warrants as a
safer way to invest in the banks.
, founder of the
), owns 9,886,128 BAC warrants, after increasing the holding
1.05% in the third quarter. The recovery of the financial sector
overall has helped Berkowitz's fund, composed 80.8% of
financials, to rebound 30% year to date.
Another Guru holder is
. He has 4,341,462 Bank of America warrants, a 4.4% weighting in
his portfolio. Chou discussed his investment in warrants in
his 2010 semiannual letter
, calling it "one of the more interesting ways to invest in the
better capitalized banks." He bought stock warrants when they
were issued to the U.S. Treasury by banks that received TARP
funds. When the banks paid back the TARP funds, the Treasury then
either sold the stock warrants back to the banks or publicly
Chou explained five reasons the stock warrants were unique:
They are long dated, with most expiring in 2018 or 2019. This
time frame of eight- plus years
allows banks to grow their intrinsic value to a high enough level
to have an appreciable impact on the strike price of the stock
2) The strike price is adjusted downward for any quarterly
dividend that exceeds a set price.
Normally, you don't see that in a stock warrant. This is a truly
stringent condition. In this case we should give the government
credit for extracting a pound of flesh. An example: for Bank of
America, class 'A' warrants, the strike price is adjusted
downward for any quarterly dividend paid
exceeding one cent a share.
3) Many of the banks have excess capital on their balance sheet.
When the economy settles down,
we expect the banks to use this excess capital either for
buybacks or a one-time special dividend
that may reduce the strike price on the stock warrants if this
4) The concerns over financial reform and its ultimate impact on
the earning power of the banks
may be somewhat exaggerated. We believe the banks will most
likely be able to pass the majority
of the costs to customers. For an economy to flourish we need
sound financial institutions that
can generate reasonable profits.
5) Investing in financial institutions requires a leap of faith.
Mind you, this leap of faith is no
greater than those we make on any company's future prospects, its
position in the industry and
how well it will do in a future economy. Looking forward, as each
year goes by, the quality of
earnings of the banks should be higher, the books should be
cleaner, the risks will be lower and
management will be far more risk averse. Too bad we had to go
through so much turmoil to get there."
Chou also holds warrants of several other financial institutions,
including Wells Fargo (
) and JPMorgan (
Similarly, Warren Buffett owns warrants to purchase 700 million
shares of Bank of America at an exercise price of $7.14 per
share, that he may exercise at any time in the next 10 years.
Unlike Chou, Buffett did not purchase his through government
auction, but received them when he bought $5 billion of Bank of
America's 6% Cumulative Perpetual Preferred Stock through
Berkshire Hathaway (
) on Aug. 25, 2011. With a stock price of $10.64 on Friday,
Buffett could exercise the warrants today, or wait to see if the
price goes higher in the next nine years.
See more of these investors' holdings in their portfolios. Bruce
Berkowitz's is here, Francis Chou's is here and Warren Buffett's
is here.About GuruFocus: GuruFocus.com tracks the stocks picks
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