Although a half-decade has passed since the nadir of the world-spanning financial crisis that reshaped the global banking industry, many regular investors continue to view bank stocks as taboo. Even as the gutsy fund managers who piled back into bank stocks in 2009 and 2010 enjoy outsize returns on their investments, retail stock-watchers have yet to embrace the space.
In 2011, Berkshire realized tremendous profits through a special issue of Bank of America Corp (NYSE:BAC) warrants. Today, a different tranche of Bank of America warrants may provide investors with a similar opportunity to gain leverage in a stock that finally appears poised to break out. Similarly, investors can use an existing tranche of Wells Fargo & Co (NYSE:WFC) warrants to buy into this Buffett favorite at a discounted strike price.
Wells Fargo’s Warrants
Wells Fargo & Co (NYSE:WFC)’s notes confer the right to purchase shares of Wells Fargo on a one-to-one basis at a strike price of $34.01. Trading under the symbol -WT), these warrants are currently priced near $12 per share. As such, their current break-even price is right around $46 per Wells Fargo & Co (NYSE:WFC) share. This is roughly 25 percent higher than Wells Fargo’s current share price of $36.75.
However, these warrants do not expire until late October of 2018. Based on current share-price projections, it would be reasonable to assume that Wells Fargo & Co (NYSE:WFC)’s stock price will exceed $46 per share before that time. In fact, these warrants could be a great way for regular investors to use low-risk leverage to buy into a classic Buffett pick at a significant discount.
Bank of America Corp (NYSE:BAC)‘s Warrants
Meanwhile, Bank of America offers its own stock warrants. The company’s “Class A” -WTA) warrants confer the right to purchase Bank of America’s stock at $13.30 per share on a one-to-one basis. These instruments expire in 2019 and currently trade near $5.50. As such, their current break-even price of $18.80 is roughly 57 percent higher than Bank of America’s $12-per-share stock price. However, most market-watchers expect Bank of America to begin trading above the range in which it has been stuck. By 2019, the company’s stock could be worth double or even triple its current value.
Buffett’s Take
Wells Fargo and Bank of America are not the only two companies whose warrants have earned substantial sums of money for Mr. Buffett. The Oracle of Omaha has played around with warrants in Goldman Sachs and other financial firms; however, his maneuverings in Bank of America and Wells Fargo have been notable for their scale.
Based on Buffett’s seemingly insatiable appetite for Wells Fargo’s stock, it appears that he believes more strongly in the medium-term and long-term potential of that company. His BofA investment may well have been driven by a one-off opportunity that is not likely to be repeated. Buffett’s continued enthusiasm for Wells Fargo seems to have no regard for its stock price. Indeed, the notably cautious investor’s faith in the company speaks volumes.
What’s the Right Move?
Based on current valuations, Wells Fargo’s warrants seem to be a much safer investment. The instruments’ break-even price is just 25 percent higher than Wells Fargo’s current stock price. By comparison, Bank of America’s Class A warrants’ break-even price is about 57 percent higher than the company’s current stock price. In addition, Wells Fargo has the full backing of Warren Buffett/Berkshire Hathaway and is generally regarded to be a safer investment. As such, risk-averse investors may prefer its warrants over Bank of America’s own instruments.
The article Buy Warrants In One Of Buffett’s Favorite Companies originally appeared on Fool.com and is written by Mike Thiessen.
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