As a result of the bailout of General Motors (NYSE:GM), the U.S. Treasury and the UAW were given warrants on the stock which are now publicly traded. Warrants work just like call options where the holder has the right to buy GM stock at a specific price on or before the expiration date - click here for more general information about warrants. GM now has three different series of warrants that trade on the stock; therefore I am doing a follow-up to my previous article on the GM warrants. Also, two series of the warrants (Series A and Series B) currently trade at a very low premium to the stock. As I discuss in another article, shares of GM are priced at value levels and are being artificially depressed by heavy US Treasury selling. The treasury is selling shares at a pace of roughly 25 million per month which presents long term investors with a great chance to get into a stock which should be much higher.
In August, a new series of warrants began to be publicly traded. The new Series C warrants were sold by the UAW Retiree Medical Benefits Trust and were priced at $3.85 per share. They provide the holder with the right to buy a share of GM for $42.31 on or before the expiration date of December 21, 2015. The longest duration options that are for sale on GM now expire in January 2015 so these warrants provide almost a full year of extra exposure. Unlike the other two series of warrants, Series C warrants are significantly out-of-the-money so they are much more speculative. Shares will have to rise above $42.31 by December 2015 for these warrants to have any value at expiration. If investors think shares will rally well above that level by expiration, these warrants provide significant returns over buying the common stock though.
Given the three different warrants that trade on GM with different strike prices and expiration dates, investors interested in buying GM warrants are able to pinpoint what expiration date they want for the warrants. The table below consolidates the relevant information on each of the three types of warrants.
GM Stock | GM Series A Warrants | GM Series B Warrants | GM Series C Warrants | |
Current Price | $34.38 | $24.95 | $17.29 | $3.42 |
Expiration | -- | July 10, 2016 | July 10, 2019 | December 21, 2015 |
Strike Price | -- | $10.00 | $18.33 | 42.31 |
Time Till Expiration (years) | -- | 2.90 | 5.90 | 2.34 |
Premium Time Value per Year ($) | -- | $0.20 | $0.21 | $8.87 |
Total Stock Increase Required for Break Even ($) | -- | $0.57 | $1.24 | $11.35 |
Total Stock Increase Required for Break Even (%) | -- | 1.66% | 3.61% | 33.01% |
The Series A and Series B warrants currently trade at a very low premium to shares of GM. As a result, these provide a great opportunity for investors to gain long-term leverage on the company for very low premiums. The Series C warrants currently trade at a significant premium to shares of GM but if shares of GM rise above the strike price, holders will see significant returns.
The Series C warrants were sold just this month to the investing public. The initial sales price and demand for the warrants suggests that large investors believe there is a reasonable chance that GM shares trade over $42.31 by the end of 2015 - and those investors were willing to pay $3.85 for the right to buy the shares at that level. The fact that the UAW was able to sell 45.5 million of these warrants at that price is a big vote of confidence for shares of GM and an indication as to the expectations for future performance of the shares.
Investors looking for value stocks should begin to build a position in GM while the government is depressing the share price with significant amounts of stock for sale. Once this selling is done, shares are expected to appreciate significantly and the GM warrants provide a good lower-cost method for long term investments.
Disclosure: I am long GM. 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. I am long GM Series B Warrants.
