BAC-WT - Bank of America Warrants

[benchmark]

 

We sold....only small position left...if it drops we would buy again. Raised cash  for other opportunities....everyone seems pretty happy as are we! (not greedy yet..but happy!) Europe has been fixed again as it has been 6 or 7 other times....perfect correlation...

 

Thanks for the tireless work all have done on the thread especially Ericopoly. We hope it continues to ride up for you guys and hits the tangible book for Sanjeev as a nice Xmas gift.

 

Dazel.

 

Sold and bought MBIA?

 

[Parsad]

Mistake to sell out.  We had a huge position in warrants, so we sold a very tiny amount as we average out a bit.  But we are keeping all of the BAC equity and 75% of the warrants for the long-term. 

 

This will hit $13-15 in the next year...and I suspect the exercise price will start to fall quickly as BAC starts to pay out cash...and they will pay out a ton over the next few years.  You cannot touch their deposit base, so as long as they continue to operate conservatively, I cannot see why they will not do nearly as well as WFC long-term.  Cheers!

[ERICOPOLY]

Mistake to sell out.  We had a huge position in warrants, so we sold a very tiny amount as we average out a bit.  But we are keeping all of the BAC equity and 75% of the warrants for the long-term. 

 

This will hit $13-15 in the next year...and I suspect the exercise price will start to fall quickly as BAC starts to pay out cash...and they will pay out a ton over the next few years.  You cannot touch their deposit base, so as long as they continue to operate conservatively, I cannot see why they will not do nearly as well as WFC long-term.  Cheers!

 

It's merely a 50 cent dollar though Sanjeev with a relatively high degree of certainty.  Can you elaborate more on why it's a buy?

 

 

 

 

[nkp007]

Mistake to sell out.  We had a huge position in warrants, so we sold a very tiny amount as we average out a bit.  But we are keeping all of the BAC equity and 75% of the warrants for the long-term. 

 

This will hit $13-15 in the next year...and I suspect the exercise price will start to fall quickly as BAC starts to pay out cash...and they will pay out a ton over the next few years.  You cannot touch their deposit base, so as long as they continue to operate conservatively, I cannot see why they will not do nearly as well as WFC long-term.  Cheers!

 

It's merely a 50 cent dollar though Sanjeev with a relatively high degree of certainty.  Can you elaborate more on why it's a buy?

 

That's enough for me LOL.

[Parsad]

Mistake to sell out.  We had a huge position in warrants, so we sold a very tiny amount as we average out a bit.  But we are keeping all of the BAC equity and 75% of the warrants for the long-term. 

 

This will hit $13-15 in the next year...and I suspect the exercise price will start to fall quickly as BAC starts to pay out cash...and they will pay out a ton over the next few years.  You cannot touch their deposit base, so as long as they continue to operate conservatively, I cannot see why they will not do nearly as well as WFC long-term.  Cheers!

 

It's merely a 50 cent dollar though Sanjeev with a relatively high degree of certainty.  Can you elaborate more on why it's a buy?

 

No, actually it's a 50 cent dollar, growing at a minimum of 10% ROE for the foreseeable future...possibly 12-15% ROE.  Combine that with a nearly untouchable deposit base, focused operations, and increasing efficiency, you have a business that could very well be priced at 1.2 times book in 3-5 years...$30.  I could see investors selling out once it is trading at 80-90% of book, but it is still quite early, with very few other quality opportunities of this nature in a market that has risen dramatically.  Cheers!   

[jeffmori7]

Mistake to sell out.  We had a huge position in warrants, so we sold a very tiny amount as we average out a bit.  But we are keeping all of the BAC equity and 75% of the warrants for the long-term. 

 

This will hit $13-15 in the next year...and I suspect the exercise price will start to fall quickly as BAC starts to pay out cash...and they will pay out a ton over the next few years.  You cannot touch their deposit base, so as long as they continue to operate conservatively, I cannot see why they will not do nearly as well as WFC long-term.  Cheers!

 

It's merely a 50 cent dollar though Sanjeev with a relatively high degree of certainty.  Can you elaborate more on why it's a buy?

 

No, actually it's a 50 cent dollar, growing at a minimum of 10% ROE for the foreseeable future...possibly 12-15% ROE.  Combine that with a nearly untouchable deposit base, focused operations, and increasing efficiency, you have a business that could very well be priced at 1.2 times book in 3-5 years...$30.  I could see investors selling out once it is trading at 80-90% of book, but it is still quite early, with very few other quality opportunities of this nature in a market that has risen dramatically.  Cheers! 

 

Well said, Sanjeev. Actually, this is just the beginning of the story, why would someone sell now? I would like to hear your reasons Dazel, or others?

[Uccmal]

Instead of selling I bought some 9$ August puts.  Trying to push off any selling into the next tax year.

 

 

[PlanMaestro]

You are quite the pessimist Sanjeev … or conservative. ;)

 

No, actually it's a 50 cent dollar, growing at a minimum of 10% ROE for the foreseeable future...possibly 12-15% ROE.  Combine that with a nearly untouchable deposit base, focused operations, and increasing efficiency, you have a business that could very well be priced at 1.2 times book in 3-5 years...$30.  I could see investors selling out once it is trading at 80-90% of book, but it is still quite early, with very few other quality opportunities of this nature in a market that has risen dramatically.  Cheers! 

[benhacker]

Well said, Sanjeev. Actually, this is just the beginning of the story, why would someone sell now? I would like to hear your reasons Dazel, or others?

 

My take on this (I haven't sold any common or warrants yet) is that it really comes down to position sizing and portfolio / risk management.

 

I'll speak for me (rough numbers):

 

1) Started my initial position in BAC warrants last summer (maybe a 0.25-0.50% position as I was still not fully comfortable with the investment / management).

2) bought a full stake (common) mostly on the first day of 2012 with a few dribs and drabs before and after.  Basically made it a ~3.5% position.

3) I added warrants for clients who didn't have enough / any exposure just a few months ago around $3.60-3.70.  This was maybe another 0.5% of assets, but was pretty small (just really bringing some new clients to the right weighting).

 

Now look at the decision I have to make:

1) BAC Common + warrants are now a ~6% position in my accounts.

2) So when the common was at $5.70 at the beginning of the year, I had a 3.5% weighting... now I have a 6% weighting at $10+.

3) I think you can say that there is less certainty then just 12 months prior... but you realize that anyone *not* selling BAC stock now who had a full position 12 months ago is saying that they are comfortable with a roughly 80% higher weighting of the stock at a price nearly 100% higher.

 

So while I haven't started selling, I think portfolio management plays a lot into why people sell.

 

For the younger investors out there who's cash inflows into their portfolio are a meaningful portion of NAV (used to be me, but not anymore), this isn't as applicable as your own added cash has a re-balancing / diluting function.  For a mostly static portfolio that doesn't have a ton of new money coming in, stocks doubling tend to make people at least think about risk management even if the story is improving.

 

I think about it like this:

 

1) Was I too chicken about BAC in Jan '12?

2) Am I too optimistic about it now?

 

Maybe BAC should have a higher weighting by 80% than just 12 months ago while it's price is double... but to me that is a tough argument to make.  So one of those two statements above must show that I made a mistake... (says the guy who hasn't sold yet....)

 

Ben  - my 2 cents.  This is why value investing with limited trading has a fairly big component of momentum in it (IMO)... let the winners run for a bit at least causes some interesting position sizing implications.

[tng]

If BAC plays out like we expect it to, then I will try to "hold forever" in my taxable accounts (or at least until the next time leveraged 20x, if it is trading at 2x book, or some other signs of significant overvaluation/risk). I think a significant portion of the returns in the common stock will be self realizing through the dividend, it is hard to imagine it trading at a significant discount to book for a long time when it starts paying a larger dividend. However, if BAC continues to run up so fast, I may have to reconsider my strategy because AIG seems to be lagging a bit. If BAC hits tangible book and AIG is still at half of book, I will probably rebalance.

[txlaw]

Perhaps Dazel wants to reallocate into other opportunities, although it is surprising that he completely sold out of BAC, given its wild undervaluation.

 

Or maybe he is betting that in the short term, Mr. Market won't realize much more about BAC, but that it will realize something about another investment (wouldn't be surprised if he was shifting money into MBI, given his post on that thread). 

 

One can always buy BAC again three months from now after the other deal (MBI?) works out, assuming he's shifting his portfolio to take advantage of some event-driven investment.  There's definitely a market (or catalyst) timing mentality there that I can understand, as I will sometimes shift my portfolio that way.  I haven't yet come to a conclusion on whether or not taking such timing considerations into account is futile over the long run.

 

I actually started shifting a bit of my AIG position into BAC (opposite of Eric?) in late October, and now the market value of my BAC position is roughly equal to my AIG position.  The timing has worked out in this case.  I probably won't sell any more BAC this year (can't bear the thought of paying even more taxes than I will have to next year), but I was considering doing so solely for the purposes of boosting my MBI position. 

 

One last thing to note: as much as I like to tweak investment managers who insist that it is poor risk management to have highly concentrated portfolios -- I happen to think that's BS, at least as a rule to be applied in all cases -- I think that managing clients' or your own emotions is a valid reason for having a certain portfolio sizing approach.  Also, it makes sense to have at least a somewhat diversified portfolio if you have outflows that require liquidating positions.

[ERICOPOLY]

I actually started shifting a bit of my AIG position into BAC (opposite of Eric?) in late October

 

I completely sold out of AIG on the day of the BAC earnings report and the following day.  All went into BAC.

 

The primary reasons were:

1)  We're at 9% already and the rest is all yours

2)  Oh, and by the way the GSE's have told us what they want from us and worst case it will be an extra $1b.

 

[ericd1]

I would sell my BAC position if I had better opportunities...Perhaps Dazel has some good ones...But with 30%+ upside I'm going to stick around for awhile. Heck a $20 price in a couple of years is still a double from here.

[rkbabang]

I would sell my BAC position if I had better opportunities...Perhaps Dazel has some good ones...But with 30%+ upside I'm going to stick around for awhile. Heck a $20 price in a couple of years is still a double from here.

 

If BAC is at $20 in two years, which is almost a double, what will the warrants be trading at with 4 years to go and the strike price lower than it is today and having the opportunity to go lower still over the remaining 4 years?  I suspect much more than a double from here.  What if the common is at $25 in two or three years?  $30?  ...

 

[ERICOPOLY]

I would sell my BAC position if I had better opportunities...Perhaps Dazel has some good ones...But with 30%+ upside I'm going to stick around for awhile. Heck a $20 price in a couple of years is still a double from here.

 

If BAC is at $20 in two years, which is almost a double, what will the warrants be trading at with 4 years to go and the strike price lower than it is today and having the opportunity to go lower still over the remaining 4 years?  I suspect much more than a double from here.  What if the common is at $25 in two or three years?  $30?  ...

 

 

I'm accustomed to deep-in-the-money options having hardly any premium when it's a dividend paying stock.  That's because the imputed interest rate cost of the synthetic loan is effectively paid for by the complete loss of any dividend.

 

However in this case we effectively will get the entire dividend.  Thus there is a goodly amount of premium in the warrants that will not decay as they go into the money -- it will be the capitalized cost of interest for the synthetic loan.

 

Higher interest rates would benefit the value of that capitalized cost of interest for the synthetic loan. 

 

But at today's low interest rates how much will it be worth?

 

[biaggio]

regarding portfolio sizing as a reason to sell- I think of portfolio sizing when buying, then let your winner run until it gets close to estimated IV. If IV grows ,more reason to hold on. (Except for Ericopoly, if he is still having some trouble sleeping, I think he should take some off the table if stock runs up)

 

As Peter Lynch said don t pick the flowers and water the weeds (hopefully BAC is a flower and not a pretty weed)

[ERICOPOLY]

I have trouble sleeping whenever my net worth moves suddenly.  Last night I slept far worse than I did the night before.  Same thing happens when my net worth drops suddenly.  After a few weeks I get anchored to the new level and go back to sleep relatively better again.

 

Up or down -- either way the anchor has been pulled and I'm adrift.  I don't sleep well in a drifting ship and I just need that anchor to keep me settled it.

 

But I'd say out of one or the other, I sleep worse when my net worth is suddenly on the rise with new high water marks.  I get kind of manic and just can't get settled.

[Rabbitisrich]

I have trouble sleeping whenever my net worth moves suddenly.  Last night I slept far worse than I did the night before.  Same thing happens when my net worth drops suddenly.  After a few weeks I get anchored to the new level and go back to sleep relatively better again.

 

Up or down -- either way the anchor has been pulled and I'm adrift.  I don't sleep well in a drifting ship and I just need that anchor to keep me settled it.

 

But I'd say out of one or the other, I sleep worse when my net worth is suddenly on the rise with new high water marks.  I get kind of manic and just can't get settled.

 

I try to think in terms of business results relative to purchase price over time. It's easy to get knocked into mainstream financial thinking when the blood starts moving. In the case of BAC, this helped a lot as much of the exciting news came and went with nary a market move.

[biaggio]

I can only imagine

[benchmark]

I have trouble sleeping whenever my net worth moves suddenly.  Last night I slept far worse than I did the night before.  Same thing happens when my net worth drops suddenly.  After a few weeks I get anchored to the new level and go back to sleep relatively better again.

 

Up or down -- either way the anchor has been pulled and I'm adrift.  I don't sleep well in a drifting ship and I just need that anchor to keep me settled it.

 

But I'd say out of one or the other, I sleep worse when my net worth is suddenly on the rise with new high water marks.  I get kind of manic and just can't get settled.

This reminds me of a friend, whose company was purchased back in the bubble days, he couldn't sleep the day it was announced, even though he was just an employee at the time.

 

Although he could have made millions out of the deal -- but he left just after a year of the purchase to join another start up hoping to make more -- except the new company disappeared in a year after burning more than 200M of investment....

[berkshiremystery]

I currently do my winter sleep and have done nothing with my BAC common, a-warrants and leaps,... same applies to my AIG position,... which are both my biggest concentrated bets since the old FFH days years ago. Why should I sell, while the best is still ahead over the next couple of years. I keep it almost as simple as Eric. The best thing was that I barley was able to read the boards while I was away for some time. It kept my mind clear of any noise. I noticed at myself already years ago, that the less I stare at a price, the more it advances. Therefore I plan to keep a very, very long winter sleep.

[ERICOPOLY]

I have trouble sleeping whenever my net worth moves suddenly.  Last night I slept far worse than I did the night before.  Same thing happens when my net worth drops suddenly.  After a few weeks I get anchored to the new level and go back to sleep relatively better again.

 

Up or down -- either way the anchor has been pulled and I'm adrift.  I don't sleep well in a drifting ship and I just need that anchor to keep me settled it.

 

But I'd say out of one or the other, I sleep worse when my net worth is suddenly on the rise with new high water marks.  I get kind of manic and just can't get settled.

 

I try to think in terms of business results relative to purchase price over time. It's easy to get knocked into mainstream financial thinking when the blood starts moving. In the case of BAC, this helped a lot as much of the exciting news came and went with nary a market move.

 

I've anchored myself by multiplying how many shares I can afford by the earnings per share.  Knowing that the earnings are "all mine" (thanks Moynihan) I can count on that mentally as my salary.  So I have this crystal clear image of how much my take is.  I could play the same game with the other banks, but my take would be less.  So I'd have to take a pay cut if I sell and diversify.  On top of that salary, I feel like there is this huge capital gain coming from revaluation.  I just can't walk from this.

[ERICOPOLY]

Out of the analysts that have revised their forecast in the wake of the Q3 results, I'm not sure if anyone is less optimisted than Sanford Bernstein's John MacDonald.

 

He is calling for a 2 cent dividend and $3b buyback.

 

He was on the Q3 conference call so it's not like he is missing any of the material. 

[jay21]

Mistake to sell out.  We had a huge position in warrants, so we sold a very tiny amount as we average out a bit.  But we are keeping all of the BAC equity and 75% of the warrants for the long-term. 

 

This will hit $13-15 in the next year...and I suspect the exercise price will start to fall quickly as BAC starts to pay out cash...and they will pay out a ton over the next few years.  You cannot touch their deposit base, so as long as they continue to operate conservatively, I cannot see why they will not do nearly as well as WFC long-term.  Cheers!

 

Agreed.  I have about a 5 to 10% position and I am only thinking about increasing it.  This is a franchise, competitively advantaged company being priced as if it will not earn its cost of capital.

 

I don't understand someone that would sell out completely.  What was the thesis there? They should be priced at .5 BV, not .3 BV?

[Parsad]

I have trouble sleeping whenever my net worth moves suddenly.  Last night I slept far worse than I did the night before.  Same thing happens when my net worth drops suddenly.  After a few weeks I get anchored to the new level and go back to sleep relatively better again.

 

Up or down -- either way the anchor has been pulled and I'm adrift.  I don't sleep well in a drifting ship and I just need that anchor to keep me settled it.

 

But I'd say out of one or the other, I sleep worse when my net worth is suddenly on the rise with new high water marks.  I get kind of manic and just can't get settled.

 

I have absolutely no trouble whatsoever sleeping, even when I've got a massive position in something in my personal portfolio. 

 

In the past, I did fret a tiny bit when taking a very large position in the fund, and it has little to do with volatility, but more on how my partners...or should I say...a couple of my partners may behave.  Over time I've come to the realization that their temperament is outside of my control, regardless of the conversations I may have with them, or how we've performed over the years.

 

When things do get choppy, or downright ridiculous like in 2008/2009, I'm actually as giddy as a school girl...it's like Christmas morning as a child...and I don't sleep because I'm scrambling for investments and ideas.  Cheers!