What Flavor Warrant Will You Have?
Back in the day. And I mean BACK in the day, even before I started trading warrants, there was one predominant warrant type.
Warrants on natural resource stocks.
It’s still a big part of the warrant world, especially with our neighbors to the north.
But, it is far, far from the only game in town these days. While on occasion I trade a natural resource stock warrant, it definitely is not the bulk of what I do.
I actually find it amusing (and profitable), as I wrote about a few days ago, when people think warrants are for grandfathers, and maybe doomsday preppers (you know, warrants on gold stocks).
Two recent warrant deals, both the result of SPAC acquisitions, are great examples of the wide spectrum of companies with warrants today.
From Conservative Real Estate…
The first warrant trades on Broadmark Realty Capital (BRMK, BRMKW). This one went through a few birthing pains to get here.
The warrant started out as most SPAC warrants do, with exercise terms of 1 warrant plus $11.50 getting you one share of common.
But, when Trinity Merger (formerly TMCX) decided to purchase a REIT, some interesting issues arose.
This dude, who calls himself Bag Holder, over at Seeking Alpha, does a bang up job of going through the issues, the valuation of Broadmark, etc. etc. and even etc. If you want some reading to put you to sleep (no offense, again, this guy is going for the gold in REIT analysis) click on over.
If you do click over though, while his fundamental analysis of the situation is well thought out and presented, if you get to the end, his trading idea is way off the mark.
Now, this article was written prior to the deal closing, so it is mute now, but can you believe he actually suggested shorting the warrants…gasp… someone play the sound of the Dementors flying out of Azkaban.
This very deal itself is a perfect example of why not to do that. Management can, and does, more frequently than you might think, change the terms of warrants to:
- Get rid of them, for various reasons, often to prevent common stock dilution, AND
- By doing so they most often, or should I say ALWAYS, sweeten the warrant terms, meaning…you know the answer…the warrants move higher. (What do you NOT WANT TO SHORT…something that can move higher because the dealer can change the rules of the game. You wanna wake up one morning totally pissed with no recourse…short a lot of warrants.)
Now, back to our regularly scheduled program.
So, what is Broadmark now? A boring REIT with warrants (not that there’s anything wrong with that). The terms are now 4 warrants plus $11.50 gets you one share of common.
If you’re so inclined, you could pick these up at a fairly low premium. They are out of the money, but still have a five year term.
Maybe you believe Broadmark is well managed, as Bag Holder does. And, you want to invest for the longer term. You have a great low cost play (by way of the warrants) on the common moving higher.
Of course you forgo any dividend benefits, as you would get with the common stock, but that’s the trade off for owning a “cheap” warrant here.
(If you didn’t read Bag Holder’s analysis, that was the main issue, adjusting the warrant terms for a dividend each quarter, and why they changed the terms to the current ones. You can read all about it in here in the SEC filing.
So, we have warrants trading on boring REIT stocks…
…To Companies Headed for the Stars
If you’d like to do a 180, literally turning from the ground to the heavens, you can go from a REIT warrant to a space tourism warrant.
I’ve written a few times about Virgin Galactic (SPCE, SPCEW) now, but it truly represents the other end of the spectrum from a REIT.
It also sports a much higher premium than the REIT warrants. But, that’s because we’re talking about a stock that could easily double (assuming they can execute on their business plan) and cause the warrant to possibly triple.
The warrants are exercisable at 1 warrant plus $11.50 for one share of common. And, are also good for 5 years.
You see, there are warrants trading on all kinds of companies, no matter your investment profile or risk preference. There are even warrants still trading on your grandfather’s natural resource stocks, if that’s your thing.
Go here to learn more about all the different types of companies that have warrants, and learn how to add warrants to your investing tool box.