Just a quick note to update you on my personal portfolio — today I increased my holdings in the Boston Private Financial 2018 TARP warrants (BPFHW) by about 50% and my holdings in the PNC 2018 Tarp Warrants (PNC-WT) by about 30%.
The pricing of the stock and the warrant in both cases are similar to when I wrote about them as the “Idea of the Month” for April here, though Boston Private’s stock rose on solid quarterly results and then came down a bit on news that Carlyle is substantially lightening its holdings.
For Boston Private Financial, I still think the basic underlying company is doing pretty well and holds quality asset management and private banking assets, and I think the chances of the warrant paying off handsomely are strong — it’s risky, of course, since it’s quite illiquid and if the stock is below $8 in 2018 the warrant will be worthless, but at a share price of about $10 now you only need a 20% increase in the share price over the next 5+ years to break even. I’m comfortable with that bet.
And for PNC, the metrics are pretty much the same — warrants dipped quite a bit today for some reason and triggered my buy, but we are right around the exercise price so whatever you pay for the warrant today is effectively just paying for whatever you think the share price appreciation will be over the next 5-1/2 years — I think $10-12 of share price appreciation in PNC shares is extremely easy to justify, that’s less than a 20% gain, the company is a strong bank that took TARP money because they had the systemic risk exposure that everyone had to mortgage bonds but it was not among the worst offenders in risk-taking, and the stock is priced at a reasonable valuation on a PE basis and a substantial discount to historical price/book valuations.
Obviously, if we have another financial crash or the financial stocks as a whole do very poorly over the next five years, this bet won’t work out. But those are very muted expected gains in these warrant prices and we have a lot of time for them to rise to the occasion.