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Chris Moreno, CFA  

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  • Dell Vs. HP: Which One Should You Own? [View article]
    Good qualitative comparison. Thanks for the article.
    May 30, 2012. 08:45 AM | 1 Like Like |Link to Comment
  • Forget The Warrants, Just Go Long Bank Of America For The Best Risk / Reward [View article]
    Great catch on the $30.79s dividend threshold. I just went back to the prospectus and I got that wrong, the strike for those warrants only adjusts down with a quarterly dividend above $0.32 and based on my expectations that will not happen before the warrants expires. This has the net effect of making the Series B warrants even less attractive.

    My next article will likely look at an interesting way to evaluate the large cap banks to find the best risk/reward, but I could always consider a larger piece analyzing all of the outstanding warrants too. Thanks for the suggestion.

    Also glad you liked the article!
    May 18, 2012. 08:38 AM | Likes Like |Link to Comment
  • Forget The Warrants, Just Go Long Bank Of America For The Best Risk / Reward [View article]
    Hi tghtprocess, very hard to say if the stock can get back to 1.0x TBV in the near-term. My expectation is that as they put legacy issues behind them it'll get back to 1.0x TBV, but I don't feel comfortable betting that they can have that entirely sorted out by YE 2013. I do think that by 2016 they will, but putting everything behind them in only 1.5yrs seems possible, but a bit of risky bet. So while the upside of buying $10/$12 Jan '13 or Jan '14 calls might be good, you can easily give it all back if your timing is off. From my perspective, the stock just offers better downside protection so is a better bet.
    May 17, 2012. 10:03 AM | Likes Like |Link to Comment
  • Forget The Warrants, Just Go Long Bank Of America For The Best Risk / Reward [View article]
    Glad you enjoyed it firstchance. Given some of what's going on in Europe, we certainly could see financials generally head lower near-term, but if you're comfortable with a long-term view, I think the risk/reward will look even better if you get a lower entry point.
    May 17, 2012. 09:56 AM | Likes Like |Link to Comment
  • Why Amazon's Valuation Hasn't Mattered And Why That's About To Change [View article]
    Glad you enjoyed the article.
    May 17, 2012. 09:50 AM | Likes Like |Link to Comment
  • Forget The Warrants, Just Go Long Bank Of America For The Best Risk / Reward [View article]
    Hey Alessandro, glad you enjoyed the analysis. You're certainly right that there's a whole lot of uncertainty when investing in these huge mega-cap banks, but I guess what I wanted to show was that even if you think there's another shoe still to drop, the risk/reward given the valuation level looks reasonably compelling if you have a longer-term time horizon.
    May 16, 2012. 04:25 PM | Likes Like |Link to Comment
  • Forget The Warrants, Just Go Long Bank Of America For The Best Risk / Reward [View article]
    Nope, you don't get the dividends if you own the warrants, but the strike is adjusted down. Did I make a mistake in my IRR calculation? In reviewing my model, it doesn't look like I've included dividends when calculating my warrant IRR, but let me know if you see it differently.
    May 16, 2012. 04:20 PM | Likes Like |Link to Comment
  • Forget The Warrants, Just Go Long Bank Of America For The Best Risk / Reward [View article]
    Thanks Jon, glad you liked the work.
    May 16, 2012. 03:00 PM | Likes Like |Link to Comment
  • Forget The Warrants, Just Go Long Bank Of America For The Best Risk / Reward [View article]
    Hey Robin, Glad you enjoyed the analysis.

    To be perfectly honest, options aren't my strength, so don't know if I'd truly understand all of the risk you'd be taking by essentially buying a shorter-dated call and shorting a much longer-dated warrant. It seems entirely possible to me that the IV gap would never close and in the meantime if the stock remained below the strike, your long call could easily expire worthless while the long-dated warrant would have some theta bleed, but not even remotely enough to offset the complete loss in the shorter-dated call.

    But I think it's a great question. If anyone else who has been reading the comments to this article is a bit more of an options expert than me, I'd really love to get your take if there's a good way to essentially arb the implied vol differences.

    Thanks for the comment and question I think it's a really good one.
    May 16, 2012. 03:00 PM | Likes Like |Link to Comment
  • Forget The Warrants, Just Go Long Bank Of America For The Best Risk / Reward [View article]
    Thanks mbkelley75, glad you enjoyed the piece. Just wanted to add one comment re: BAC's Price/Sales ratio. In 2Q11, the firm took a $13b charge related to countrywide. This ran through their income statement as a contra-revenue item. So basically this charge lowers revenue, instead of running through expenses. Once the firm reports 2Q12 earnings this charge will no longer be in the trailing twelve month revenue number and should help improve the optics on the price-to-sales number. Hope this is helpful.
    May 16, 2012. 01:56 PM | Likes Like |Link to Comment
  • Forget The Warrants, Just Go Long Bank Of America For The Best Risk / Reward [View article]
    Hey Wall Street Smart, that's exactly right, with one little caveat, the dividends need to be greater than $0.01 in order for the strike to be adjusted but if they paid out $3.30 in dividends most of that would probably be from dividends greater than $0.01.

    So just to run the math, your MOIC (multiple on invested capital), would be as follows:

    Series A: $10 / $3.60 = 2.8x
    Stock: ($20+$3.30) / $7.35 = 3.2x

    So even in that case, the stock still offers a higher return and because you get some of the money up front via dividends, to get an equivalent IRR, you actually need the MOIC on the Series A to be even higher than the stock. Basically, the Series A warrant is just too expensive right now with an implied vol of 67%, that's just way too high.

    Doing a little more rough math, you need the stock to trade at about $22.75 for the MOIC to be equal in 2018 under the $3.30 dividend scenario. In my opinion that break-even point is too high to justify taking the extra risk associated with a levered warrant position.
    May 16, 2012. 01:23 PM | 1 Like Like |Link to Comment
  • Forget The Warrants, Just Go Long Bank Of America For The Best Risk / Reward [View article]
    Thanks for the comment MexCom. You're certainly right that if the stock trades at $40 in 2018, the Series B warrants will have the best return profile, but I tend to look at things through a probability distribution lens. Could the stock be trading at $40 in 2018? Definitely. Is it a high probability event? At least in my view, no. The reason is the firm would need to trade at a substantial premium to tangible book value (in excess of 2.0x) and I don't believe the firm will be generating a return sufficiently greater than its cost of capital to justify that kind of multiple. So if it's only a 1% probability event that it trades that high and a much higher likelihood that it trades below the adjusted strike, the probability adjusted returns on the warrant aren't great and therefore, at least in my view, don't make it a good risk/reward trade. Having said that, if you have a positive short-term view on the stock, the Series B warrants are a good levered way to play the stock, but just keep in mind that you're playing with fire because it's very possible the warrants expire worthless in 2018, so everyday that passes (where the underlying doesn't move) their value decays.
    May 16, 2012. 09:30 AM | Likes Like |Link to Comment
  • Forget The Warrants, Just Go Long Bank Of America For The Best Risk / Reward [View article]
    Hey Zammic, I don't really have a near-term forecast for the stock, but I do think that over the long-term it will head higher as it slowly puts these legacy issues behind it. I'm holding until I see it begin to trade up nearer to 1.0x TBV.
    May 16, 2012. 08:42 AM | Likes Like |Link to Comment
  • Forget The Warrants, Just Go Long Bank Of America For The Best Risk / Reward [View article]
    Thanks DeepValueLover.
    May 16, 2012. 08:40 AM | Likes Like |Link to Comment
  • Why You Need To Own BAC - 20% Expected IRR With A Sufficient Margin Of Safety [View article]
    Hey sanith_h, glad you enjoyed the article. I actually just put out another piece this morning analyzing the risk/reward of owning the long-dated 2018 & 2019 warrants vs the stock outright - http://seekingalpha.co....

    In this case, the warrants are too expensive, so just going long the common stock seems to offer the best risk/reward. I'm cautious of expressing a long position with more near-dated options because you need to get the timing right and even the Jan '14 calls may not be long-dated enough for the story to have played out by then.

    Options, of course, offer you leverage, so if you have a near-term view on the stock's movement (I do not), then maybe that's a decent way to express the trade, but for a risk-averse guy like me who doesn't expect to get the near-term movements right, options aren't worth the risk.
    May 16, 2012. 08:39 AM | Likes Like |Link to Comment
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