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Dudley Baker

Dudley Baker

Dudley Pierce Baker is the founder and editor of Common Stock Warrants and its predecessor, Precious Metals Warrants and a 1967 graduate of St. Mary’s…

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Special Situations Alert For Savvy Investors

Investors should always be on the alert for special situations that appear in the markets from time to time.

Our definition of a special situation would be when opportunity and timing come together and present investors with a greater than normal chance for exceptional gains.

We believe the current time in the equity markets is approaching this special situation and suggest that investors be ready to act soon by establishing positions in long/term warrants.

In the United States with the totally dysfunctional government and a pending default on the government debt, the Dow Jones and the S&P 500 are holding up amazingly well.

But, for how long we ask and why have they been so strong of late? The potential for a collapse is clearly upon investors.

With a collapse, in our opinion, would come opportunity and this would present an excellent entry point for some of your favorite stocks.

Many of our readers are investors in gold, silver and the natural resource shares. The resource sector has been our personal focus of attention since the beginning of the bull market in 2001.

This sector has been brutalized over the last two years and there are numerous opportunities but we are of the opinion that a bottom is not yet in place. Yes, we can argue this decision, but we shall continue to remain cautious for now but are looking for positive signs everyday in the technical indicators to assist us.

Some of you may be familiar with warrants. Warren Buffet and Rick Rule, among others, know about warrants and the benefits thereof and would never do a deal without warrants attached to their investments. They would negotiate the longest terms possible, definitely a minimum of two years but more likely three to five years and these warrants would be classified as long-term warrants.

What is a warrant?

Most investors are familiar with stock options, calls and puts so let's go with this core knowledge. A call option is defined as a derivative giving the holder the right, but not the obligation, to acquire the underlying security at a specific price and expiring on a specific date in the future. A call option may have an expiration of usually no more than 12 months.

The major difference with warrants is that a warrant is actually a security issued by a company usually in connection with a financing and frequently referred to as an 'equity kicker', an incentive, if you will, to get the deal done. This is what Warren Buffet and Rick Rule look for, this major 'equity kicker', otherwise they would not be assisting with a financing.

Most warrants are issued in connection with private placements. Virtually all companies in the natural resource sector have issued warrants but most will never trade. In the United States, again we see financings every week with warrants attached to a new equity offering but most of these warrants will never trade.

However, the good news is that there are around 200 stock warrants that are trading in the United States and Canada. These warrants are issued symbols, trade like common shares and can have initial expiration dates from two years to ten years. Company management and their financial advisors make all the decisions of details of the warrants including whether the warrants will trade or remain privately held.

What will my broker say?

Hopefully, you are a savvy investor and have an online brokerage account and do not need the assistance of a broker. Chances are if you would call your broker and say you would like to buy the warrants trading on General Motors, he would either laugh or/and would not even know what you are talking about. In fact, he/she should be asking you, which one, as there are currently three warrants trading on General Motors.

Why buy warrants instead of the common shares?

Every investor whether individual or professional, wants to maximize their gain on any transaction but unfortunately, many do not consider long-term warrants for one and only one reason; a total lack of knowledge and understanding.

In summary, it is all about gaining more leverage and in most situations, if an investor is anticipating a gain of 100% in the common shares, then the warrants should produce a gain of 200% and thus, we would say, the warrants produce a 2 to 1 leverage over the common shares.

Basic Requirements

  • Find a company you like.
  • The company has long term warrants trading - over two years of remaining life
  • The current market environment is positive; bull versus bear.
  • The timing is right.

Timing your entry point is always extremely important for any investment and this is where we come back to the special situation alert with which we started this article.

The timing is right in front of us to make our investments and a great time to be considering long- term stock warrants and making a list of those opportunities.

Positive Aspects of long term warrants

  • Leverage of 2 to 1 over buying the common shares.
  • Substantial lower price than buying the common shares.

One of the largest financial institutions in the United States has a long-term warrant trading.

It does not expire until 2018 and our leverage calculations look very positive. The common shares current sell for around $41.00 and the warrant below $14. Thus, an investor can control the same number of shares by buying the warrants at $14 instead of paying $41. One of the big name newsletter writers currently recommends this financial company, but obviously does not know the company has a long term warrant trading on the NYSE. I may tell him at an upcoming investment conference in San Francisco in November, but then, he should already know so why should I have to tell him.

Negative aspects of warrants

Unfortunately there is a negative to warrants and that is if the common shares are trading below the exercise price of the warrant on the expiration date, then the warrants will be totally worthless.

This is exactly the same situation for call options and it the primary reason that investors need to pick companies you like that have long term warrants.

We trust this article has been of value to you and we welcome you to visit our website for additional information on stock warrants at www.CommonStockWarrants.com. Also, don't forget to signup for our weekly email, The Warrant Report.


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