GM Warrants - A Better Buy Than GM Common Stock

Apr.14.13 | About: General Motors (GM)

Warrants are relatively common for banking stocks these days and they are a popular way to gain long-term leveraged exposure to the companies. Outside of banking stocks though, warrants are relatively rare. There are two series of General Motors (NYSE:GM) warrants that trade though. These warrants, like most bank warrants, were created when the government bailed out the company in the recent financial crisis.

One popular aspect of many TARP warrants is dividend protection, where the strike price of the warrant adjusts downward by any amount of dividends paid over a specific threshold. Regretfully, these GM warrants carry no dividend protection. Thus warrant holders should strongly prefer share buybacks instead of dividends if GM returns cash to shareholders.

The table below shows the relevant information about the warrants including their strike price, expiration date, and current price. Also, the table shows the time value of the warrants per year till expiration and the compound annual growth rate of the stock required for the warrants to break even at expiration.


GM Stock

GM Series A Warrants

GM Series B Warrants

Current Price

$ 29.75


$ 13.20



July 10, 2016

July 10, 2019

Strike Price




Time Till Expiration (years)




Time Value per Year ($)




Stock Price Increase Per Year Required for
Break Even (%)




Click to enlarge

The growth in the stock required for the warrants to break even is very low. This illustrates that there is nearly no time premium built into the shares. Since the time premium is so small, these warrants could serve as a good stock replacement strategy. The strike price of the warrants is well below the current share price in both instances. This means they will be somewhat more volatile than the stock. Both warrants are very liquid, with average trading volumes over 175,000 per day. Also, the bid/ask spread in both series of warrants is frequently under $0.05. GM does not currently pay any dividends as well. These factors make the GM warrants more attractive investments than GM stock.

Registration documents for the warrants can be found here. The warrants trade under a variety of symbols, depending on the brokerage (GM.WS.A, GM/WS/A, GM.WSA, etc).

To demonstrate the leverage of the warrants, the table below presents a variety of stock prices and calculates the returns for the stock and both series of warrants at expiration. Keep in mind that the stock returns don't account for any dividends paid and the two series of warrants expire at different times. The Series B warrants have nearly twice as long till expiration so there's much more time for the stock to rally. As an example, for the stock to reach $45 by the time the Series A warrants expire, the stock must go up at roughly 13% per year but only 7% per year to be at the same level by the time the Series B warrants expire. Also, note the average 12 month analyst price target is roughly $35.


GM Stock Returns

GM Series A Warrant Returns

GM Series B Warrant Returns

GM Stock Price: $25




GM Stock Price: $30




GM Stock Price: $35




GM Stock Price: $40




GM Stock Price: $45




GM Stock Price: $50




Click to enlarge

The biggest risk facing the warrants is a possible announcement of a dividend. There is no expectation of a dividend announcement any time soon by the company though. If a dividend was announced, the re-valuation of the warrants would be very minimal. The warrants have only a few percentage points to fall before the time value on the instruments would be zero. The Series A warrants trade at a total time premium of 3% of the warrant price and the Series B warrants trade at a time premium of 13% of the warrant price. It is highly unlikely that the warrants could ever fall to a negative time premium because the warrants could be bought and immediately exercised for a profit.

After this research, the GM warrants present a more compelling investment than the GM common stock because of the increased leverage they have and the minimal additional cost of this leverage.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.