In my previous TARP Warrants article, published on December 25, 2011, I suggested that Bank of America (BAC) A warrant offers long-term investors a wonderful opportunity for capital appreciation. Since then, the BAC A warrant has appreciated from $2.07 to $3.20, an absolute return of 54.6%, despite recent panic due to developments in the eurozone and labour reports from the U.S.
In this article, I have two goals in mind. First is to provide updated adjusted strike prices and second is to re-examine investment merits of these warrants.
As of June 1, 2012, only Hartford Financial and Lincoln National's had minor strike price adjustments. Other institutions' quarterly dividend payments continue to be below their adjustment threshold.
BAC A Warrant, JPMorgan Chase (JPM), Lincoln National (LNC) and Hartford Financial Services (HIG) appear to be the better deals because their underlying book value to share price in relation to their strike price, as well as potential improvement to their return on assets towards the industry averages.
Of the four warrants, BAC A Warrant continues to offer the best return potential for long-term investors because the company's current depressed common share price while it continues to improve the deposit banking franchise. BAC will also benefits from favourable characteristics in the commercial banking industry as discussed in my other article.
Long-term investors should find these TARP warrants very interesting because of their unique characteristics, such as long expiration date, adjustable strike price from dividend payments, and share buyback protection. These unique characteristics make this class of securities much more attractive compared to the common shares, with similar risk of permanent capital loss.
On a different note, BAC A warrant's performance also reaffirmed the best way to protect ourselves in a volatile market is to acquire securities that are significantly below their true value and be patient. In his book "Margin of Safety", Seth Klarman stresses the importance of a bottom up, fundamental approach to find opportunities with greatest discrepancy between value and price. Long-term investors should note that current market participants continue to frown upon Financial/Insurance companies while these companies continue to improve their fundamentals.
Disclosure: I am long BAC.