Tuesday , 21 September 2021

Long-Term Warrants: The “Secret” To Enhanced Returns

Investors who would like to add the potential for amplified returns to the commodity, cannabis and psychedelics investments that they have high hopes for should seriously consider long-term stock warrants, where companies offer such opportunities, as a cheaper way to gain exposure to such companies versus purchasing common shares. In doing so, if history is any guide whatsoever, they should generate dramatically higher returns as a result.

An original article by Lorimer Wilson, Managing Editor of munKNEE.com, Your KEY To Making Money

What are Warrants?

For those of you who are not familiar with warrants, they give the holder the right, but not the obligation, to purchase the common shares of the company at a specific price within a specific time period after which, if not exercised, they expire worthless although they can be traded up to the expiry date just as with the associated stock.

Canadian Investors Take Note

Canadian investors have the option of either exercising the warrants (i.e. converting them into actual stock in the associated company according to the terms of the warrant) once they are “in the money” or selling them outright at any time before they expire. As there are symbols for all Canadian warrants the placing of orders is very easy to execute and, as such, it is convenient to use online brokerage firms if so inclined.

American Investors Take Note

American investors, unfortunately, can not convert their warrants into the associated stock like Canadians and experience the added leverage. They can only sell their position before the expiration date – and it is recommended that they do so 6 to 12 months before the expiry date because the value of a warrant often drops drastically during its final months of life – because, according to U.S. law, Americans cannot exercise a Canadian warrant unless its associated shares have been registered with the SEC and that is almost always never the case.

The above being said, Americans can still reap the potential enhanced returns that a warrant provides compared to the associated stock and perhaps, upon selling, benefit from additional currency exchange profits should the USD (used to buy the warrant) decline vis-à-vis the CAD (the currency one would receive upon selling the warrant) in the coming years.

Many American online brokers are not set up with the symbols for warrants trading on one of the Canadian stock exchanges so it may be necessary to deal with a broker directly and have him/her enter the order for you. Unfortunately for many American investors, however, some brokers/financial advisors may say that they can’t execute your order but that is just hogwash, though, as any broker who says that is actually confessing that he/she doesn’t know how to buy such securities and is too lazy to find out how to do so and provide the service and expertise you are paying him/her for. If that is the case, it is important that you ‘tell’ them exactly what you want them to do on your behalf and most will be more than happy to comply. That’s where your knowledge as to what the CUSIP number is for the stock you want to buy comes in. CUSIP stands for Committee on Uniform  Security Information Procedures which are unique codes established by the American Bankers Association for all Canadian and American securities. For more information read Americans: Use CUSIP Numbers When Buying Canadian Exchange Listed Cannabis Stocks – Here’s Why & How.

Steps for Successful Warrant Investing

  1. Determine which companies offer long-term warrants by going here.
  2. Choose a company that offers a long-term warrant of at least 24 months duration because the longer the remaining life of a warrant the more time there is for the company to execute on their business plan and more time in the event of a market downturn for a favorable turnaround.
  3. Select a company that you think has great potential because if the company does not perform and execute on its business plan the common shares will not rise and, therefore, their associated warrants will nor rise either and, if the common shares decline, their associated warrants will decline by an even greater percentage. Visit the company’s web site for their latest activity and results and review the company’s latest quarterly financial results to determine their financial health.
  4. Identify a warrant currently priced to deliver an enhanced return of at least 1.5-to-1 (i.e. a 50% greater return than the associated stock) based on your due diligence (go here for an example of how to calculate the Return on Investment (ROI) of a warrant as compared to the associated stock) or you can visit CanadianWarrants.com or CommonStockWarrants.com (subscription) to learn which warrants they calculate to be bargains, under-valued and fairly valued to help you make your decision.
  5. Buy your chosen warrant when you think the market is favorable because, while warrants out-perform their associated stock in an up market, they under-perform much more so than their associated stock in a down market.
  6. Don’t forget to sell the warrant before it expires (applicable to both American and Canadian investors) or, for Canadian investors only, to convert the warrant into the associated stock if the exercise price has been reached prior to the expiration of the warrant.

Number of Long-Term Warrants to Choose From

  • There are 221 Canadian warrants currently trading on one of the Canadian stock exchanges (Source) of which only
    • 69 (31.3%) have a long-term duration, i.e. expire at least 24 months from now:
      • 13 (5.9%) expire in 2026,
      • 7 (3.2%) in 2025,
      • 42 (19.0%) in 2024 and
      • 7 (3.2%) expire in the latter part (October onwards) of 2023.
  • From my analysis, however, only 13 (5.9%) or so of those 69 long-term warrants appear to have any likelihood, mathematically, of coming into the money (i.e. rising to equal or surpass their exercise price and, as such, becoming convertible into the associated stock).
    • Keep in mind that a fundamental analysis of the company might well reduce that number even further if it is deemed in your due diligence that some, or all, of the companies are poorly managed, poorly financed, have poor output prospects and/or very high costs of production.

Follow-up articles will compare the performances of my portfolio of 13 long-term warrants versus their associated stocks to illustrate the contention that long-term warrants out-perform their associated stock. It will prove to be a VERY interesting exercise.

Related Articles from the munKNEE Vault:

1. Americans: Use CUSIP Numbers When Buying Canadian Exchange Listed Cannabis Stocks – Here’s Why & How

It is easy for Canadian investors to execute orders for cannabis stocks using their Canadian symbol but it is not as straight forward for those individuals (i.e. Americans) using non-Canadian brokerage houses because many brokerage houses and online brokers don’t know the symbols for the cannabis penny stocks you might wish to buy. That’s where the use of CUSIP numbers can be very helpful.

2. Stock Warrants: Do You Have a “Ferrari” In Your Portfolio? (+5K Views)

Rarely do I see others writing about stock warrants so I was delighted when Marin Katusa went into detail describing the benefits, as well as the potential risk factors, with warrants as outlined below.

3. Gold & Silver Warrants: What are They? Why Own Them? How are They Bought & Sold? (+21K Views)

With all the interest in physical gold, silver and other commodities these days, and the large/mid-cap companies who mine the metals and the juniors who are exploring for them, it begs the question: “Why is no one writing about the merits of investing in the long-term warrants associated with a few of those companies?” Merits? Absolutely! Here is a primer on virtually all that you need to know about warrants and how to invest in them for major profits.

4. Capture Some Incredible Potential Gains By Investing In Stock Warrants (+2K Views)

If you don’t understand stock warrants, you are not alone. Very few of the professional newsletter writers and analysts understand them so why should you? Allow me to give you a brief education on stock warrants in the following paragraphs and tell you exactly why you need this information.

5. Increase Your Returns With Warrants – Here’s How (+2K Views)

The warrant investor needs to be aware that owning the stock outright is the conservative approach. When using the warrant, the basic common stock MUST appreciate to a certain level BEFORE the warrant’s risk/reward basis becomes better than an outright stock purchase…

6. Warrants “Don’t Get No Respect” But They Should – Here’s Why

This article offers a tutorial on warrants as an underused investment vehicle, disabuses myths about warrants, shares the names of some warrants that warrant attention and makes the case for adding warrants to one’s portfolio.

7. My Rules for Successful Investing In Stock Warrants

Very few investors know about the potential benefits via the additional leverage that warrants can offer but they are substantial if you follow the 4 rules I present in the article below.

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