Chaim,
A lot of people are making this same bet, and you’re definitely not alone:
http://seekingalpha.com/article/889291-aig-warrants-demystified
http://www.fool.com/investing/general/2014/02/27/im-selling-aig-stock-and-buying-warrants.aspx
From 1999 to now, AIG’s grown book value Q2Q by 17% per quarter. However, over past 2.5 years, it’s grown by just around 3% total (according to P123 Series numbers)
See:
https://www.portfolio123.com/app/stock/fundamentalChart
So… 8%/yr growth is not a highly conservative assumption.
I think you’ve got some shot at a big winner, and I’m rooting for you, but I’m also not sure how you can say the risk of loss is zero. We’ll see. If the stock is selling for less then $45 + the warrant price you buy them at - at the time you exercise, you lose money. So, currently that’s $45 plus $26.33 or so, so $71.33. So, the stock’s gotta appreciate by 20% from current levels in the next 5.5 years for you to have been better off with the warrant. There’s a good shot it will do that - but not if the overall market tanks during that time - and stays down - or their investment returns lag their underwriting risks, or their asset sales go poorly or are received poorly about the market.
In general, about 2-3% of the companies in the SP500 ‘fail’ each year (fall to under $5)… so there is always that as well. At $45 AIG stock price, you lose.
I also think the warrants are too expensive right now, and wouldn’t add them. I might look at them at under $20 (or under 1/3 of the stock price). Assuming more than 3 years left on them. If you really love the stock, you can always buy it on margin (it’s basically free) and then buy out of the money LEAP put options to hedge the downside risk. Need, to at least evaluate all the options on this, I think - if you love AIG.
But, it’s a really big company, and it’s hard to value. Not seeing that is not ‘overcomplicating things’, it’s just not looking closely enough (for me). I haven’t gotten to the point where I’d put a lot in myself (all of this has been an exercise to see if I want to go in on my end).
If you haven’t actually gone through the underlying portfolio of assets and investments that make up ‘book value’, to determine what you think is the the true value of those assets, then it seems to me that you haven’t done what ‘fundamental value investors’ try and do - and so position size should be kept small. That’s my view still. I’ve seen tons of hedge fund letters from tons of top value investors. They will do an incredibly detailed bottom up analysis of the company’s assets on which their thesis rests (usually) - and they still often lose. I saw the bottom up work from John Paulson’s fund for years post 2008. Many of his value plays looked great (some of his mining stocks and his analysis on BofA for example). But he lost on all of them.
Any other warrants or TARP warrants you are looking at? What I really like about these long-term ‘warrants’ on value plays is the skewed ‘risk/reward.’ Risk isn’t zero, but your downside here is what you pay for the warrants, and your upside is a potentially large multiple of that. That’s attractive. I would love to take a basket of long-term value plays that have warrants (or really long-term options) and automate that process of finding 20 of them with the most attractive option/warrant price every 12 or 24 months. Have you dug more deeply into that a systematic approach to that process?
EDIT: At the time Bruce B bought, and said he saw the stock value at $58 - $60 - the Book Value per share was around $80. See:
https://www.portfolio123.com/app/stock/fundamentalChart
So, he was looking at ‘bottom up’ valuation in some way and saying that the stock was only worth about 3/4’s of it’s book value, but the market was way underpricing it.