September Idea of the Month: Leverage on Retail Real Estate

By Travis Johnson, Stock Gumshoe, September 14, 2012

This month I want to talk a little bit about warrants, and to suggest that you take another look at a stock I profiled in this space about a year and a half ago and give not just it’s stock but also its warrants a fair shake of your thinking stick.

If you’ve never heard of them, a warrant is a lot like a call option. Owning a warrant gives you the right to purchase a stock on or before some defined point in the future at a particular price. Publicly traded warrants are about as easy to buy and sell as stocks, at least for individual investors (they can be illiquid, so it’s hard to open or close big positions, but little fish like you and I can usually get in and out just fine — albeit not quite as easily or smoothly as we can buy and sell IBM or GE), and they’re less complicated and flexible than call options because there’s usually only one or two warrants on a particular stock, if any, not a long string of different strike prices or expiration dates. They’re more complicated to value, because warrant exercises create new stock and therefore they create at least a potential dilution “overhang” for investors (options don’t create new stock, they’re just contracts between investors to buy and sell existing shares at set prices in the future), but they can also often be more irrationally priced than options, at least in my opinoin.

There’s also an important difference in the way brokers treat warrants, just for your information: In most cases, brokers might try to contact you to let you know when you have a warrant that’s nearing its expiration date, but even warrants that are in the money can expire worthless and leave you with nothing if you do nothing — unlike call options, which will usually be automatically exercised if they are “in the money.” Most of the time the “do something” is selling the warrant before expiration, though sometimes people choose to exercise the warrant if they have other reasons for wanting to own the stock and are able to exercise (not every trader can exercise every warrant, even if they have the capital at hand to do so — for example, I own Sandstorm Gold warrants but, as a US investor, can’t exercise them — that privilege is reserved for Canadian ...

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