Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Are TARP Warrants the Way to Play Banks?

Companies / Banking Stocks May 03, 2013 - 03:12 PM GMT

By: Money_Morning


Tim Melvin writes: Believe it or not, the big bank rescue plan known as the Troubled Asset Relief Program (TARP) actually has created some of the best investments for profiting from a banking recovery.

As you may recall, the federal government gave money to troubled banks in order to shore up balance sheets wounded by falling real estate and mortgage security prices. As part of the program, the government took an equity stake in these institutions in the form of preferred stock and equity warrants.

When the funds were repaid, the securities - including the warrants - were auctioned off to the public.

Equity warrants are a form of derivative security that gives the holder the right to buy a stock at a certain price until the expiration date. This is much like a stock option but warrants are usually issued for a much longer period of time. They are usually traded on the exchange and are priced based on the strike price, current interest rates and length of time until expiration.

Most of the TARP warrants still have a long time to go until they expire. The majority last until about 2018.

And now is looking like a good time to buy in to these warrants.

That's because the U.S. banking industry is slowly recovering from the financial crisis. Most of them have shown improved credit trends and are in better shape than they were at the height of the crisis. Balance sheets have been rebuilt and hold capital in excess of the regulatory requirement.

Instead of buying banks' shares, you can use TARP warrants to get substantial leverage over owning the banks' common stock.

In some cases, owning the warrant creates a form of synthetic leverage as you can control shares of stock for an extended period of time for a fraction of the price of the underlying shares. Should the stock appreciate substantially over the next five years, the warrants could offer a return that is several multiples of the underlying stock's performance.

Some of the sharpest investors are using TARP warrants to take advantage of the improving situation in the banking industry and aggressive long-term investors might want to consider doing the same.

Best Investments 2013: How to Use TARP Warrants to Play Banks
Capital One Financial Corp. (NYSE: COF) is one of the banks that has paid back its TARP funding and has warrants trading in the marketplace. The warrants do not expire until Nov. 14, 2018 and have a strike price of $ $42.13.

With the stock trading at around $56 the warrants are in the money. With the warrants priced at $19.59 you are only paying a few dollars above the intrinsic value of the warrant to control the shares for the next five and a half years.

If the bank is able to meet analyst expectations of around 7% annual earnings growth in five years, Capital One could easily earn about $7.70 a share have a book value of about $85. At 15 times earnings and 1.3 times book value the shares would trade at around $110. The warrants would be worth about $67. That is about 3.5 times your original investment on the warrants in just five years.

TCF Financial Corp. (NYSE: TCB) warrants also offer an attractive profit opportunity. These warrants also expire in November 2018 and have a strike price of $16.93. The shares trade today at about $14.40 and the warrants cost just $2.12 to control shares until that time.

The Midwestern bank has seen its credit condition improve markedly over the past few years and it has one of the highest customer growth rates in the banking industry. Even with a very moderate growth rate the company could be earning $1.80 a share in five years and have a book value around $14. That implies a potential value of about $27 at 15 times earnings.

The warrants at that price are worth around $10.07 - around five times what investors would pay. The stock only has to reach about $21.20 for the warrants to at least double in value over the 65-month time frame. The leverage gained by using the warrants instead of the stock can pay off in multiples of your original capital.

For more of 2013's best investments, check out the emerging market that's returned the most so far this year.

Source :

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in