Although a half-decade has passed since the nadir of the world-spanning financial crisis that reshaped the global banking industry, many regular investors continue to view bank stocks as taboo. Even as the gutsy fund managers who piled back into bank stocks in 2009 and 2010 enjoy outsize returns on their investments, retail stock-watchers have yet to embrace the space.
Of course, risk-seeking fund managers are not the only professional investors who have come flooding back into bank stocks. Conservative value investors like Warren Buffett have latched onto certain favored names with a vengeance. In fact, Buffett has made huge and lucrative bets on banks like Wells Fargo & Co (NYSE:WFC) during the past few years. Astonishingly, Wells Fargo now makesup a full 20 percent of Berkshire Hathaway’s portfolio. Investors who believe that Mr. Buffett is on the right track may wish to investigate a useful strategy that he and others have used to gain relatively low-risk leverage in the bank space.
In 2011, Berkshire realized tremendous profits through a special issue of Bank of America Corp (NYSE:BAC) warrants. Today, a different tranche of Bank of America warrants may provide investors with a similar opportunity to gain leverage in a stock that finally appears poised to break out. Similarly, investors can use an existing tranche of Wells Fargo & Co (NYSE:WFC) warrants to buy into this Buffett favorite at a discounted strike price.
Wells Fargo’s Warrants
Wells Fargo & Co (NYSE:WFC)’s notes confer the right to purchase shares of Wells Fargo on a one-to-one basis at a strike price of $34.01. Trading under the symbol -WT), these warrants are currently priced near $12 per share. As such, their current break-even price is right around $46 per Wells Fargo & Co (NYSE:WFC) share. This is roughly 25 percent higher than Wells Fargo’s current share price of $36.75.
However, these warrants do not expire until late October of 2018. Based on current share-price projections, it would be reasonable to assume that Wells Fargo & Co (NYSE:WFC)’s stock price will exceed $46 per share before that time. In fact, these warrants could be a great way for regular investors to use low-risk leverage to buy into a classic Buffett pick at a significant discount.
Bank of America Corp (NYSE:BAC)‘s Warrants
Meanwhile, Bank of America offers its own stock warrants. The company’s “Class A” -WTA) warrants confer the right to purchase Bank of America’s stock at $13.30 per share on a one-to-one basis. These instruments expire in 2019 and currently trade near $5.50. As such, their current break-even price of $18.80 is roughly 57 percent higher than Bank of America’s $12-per-share stock price. However, most market-watchers expect Bank of America to begin trading above the range in which it has been stuck. By 2019, the company’s stock could be worth double or even triple its current value.