Motley Fool Great America Message Board

A quick update for anyone who cares… Even though my broker told me that it may take up to two weeks for warrants to convert to shares; it took only two full trading days for ROIC warrants. I requested conversion on Wednesday morning and today (Friday) I received ROIC shares in my account (I suspect that results may vary from broker to broker). I believe that this is good news for anyone who is interested in participating in dividend related events because they should be able to safely plan their conversion for a few weeks before an ex-dividend event knowing that they should get their shares long before then.

It will certainly be interesting to see how many investors convert warrants before the next quarterly report. There are a few articles written about ROIC being worth over $18 if the warrant worries were removed. I like the fact that some investors are choosing to do a cashless conversion (I didn't ask if I have that option); reducing the amount of possible dilution while taking a very safe path to investing in ROIC. I also like the fact that the company has bought back some of their warrants; smartly using a little cash to limit the amount of dilution warrants could cause. I also like the fact that small investors like me can contribute to ROIC’s cash reserves by exercising some of our warrants. IMHO, this is a very interesting investment and one of a few worth holding for the long term (10+ years).

By the way, since the warrants were just as easy to exercise as options, I still can’t understand why the market isn't offering a time premium for these warrants. The reason I keep bringing this up is because it is usually advantageous to the investor to sell his/her warrants then use the proceeds to buy the stock. In the case of ROICW it is currently the other way around; investors are giving zero time value to over 16 months of time (often that much time is worth a 10% to 30% premium).

I just place an order to exercise ROIC warrants and learned a little more about how it works. Apparently the warrants don’t go through as quickly as options do (a prior broker claimed three to four days). It is up to the company (ROIC) to process the purchase request and issue the stock and “generally that takes up to two weeks”. Once again, it was interesting to hear the broker explain my options, he explained that warrants usually have “time value” and that it may be in my best interest to sell the warrants and purchase stock using the proceeds. When I told him that the warrants trade at a small (very small) discount to the stock it was obvious he didn't believe me because there was a long pause and I could hear typing in the background… FYI, I’m exercising warrants now in order to take advantage of the dividend that will be issued near the end of next month. I’m only exercise some of my warrants right now yet this exercise should give me a better feel for how difficult or easy it will be to exercise the rest once I’m ready. It may turn or that the best thing to do is sell the warrants and buy the stock on open market. That would make complete sense if the warrants were selling with a time premium, but for some reason they aren't (which makes absolutely no sense).

Sentiment: Strong Buy

Apparently, I missed the following sentence the first time I read the article about warrants: "However, the company purchased 7.8 of the warrants themselves at $1.38, an 18% premium to yesterday's $1.17 close and implying a $13.38 stock price."

It appears that management is way ahead when it comes to share repurchasing... Buying up 7.8 of the warrants themselves (? Million warrants, ? Million dollars worth ? 7.8 warrants ? :)

Clearly that was a much smarter way of doing a share repurchase than spending near 10x for shares (at that time)

Sentiment: Strong Buy

Sorry Jim for misinterpreting your question. To find what you're looking for plug the following string into just about any search engine:

"Potential near-term gains A possible $18 and up could well come with the warrant overhang removed based on comparables."

jim, I haven’t seen the doc that talks about a forced exercise at $18 but it wouldn’t surprise me if there is one. Personally I’ll be exercising with cash instead of doing a cashless exchange but I like the fact that some of the bigger warrant holders have done cashless exchanges (resulting in less dilution to existing shareholders).

Okay, someone here please explain to me why ROIC warrants have zero time value??? I just talked to my broker about costs associated with exercising a block of warrants (basically $30 for the block which isn’t much more than the $20++ needed to exercise a block of options). I also talked with my broker about the time it takes to settle warrants (basically up to four days to receive the certificates). Afterwards we ended the conversation with both of us scratching our heads; why the heck don’t ROIC warrants trade similar to options, (or for that matter warrants), in any other security? Where’s the time premium? In fact, looking at today’s close it would be cheaper for a new buyer to buy a large block of warrants and directly exercise then rather than purchase the stock (ROIC closed at $15.74 and ROICW closed at $3.69)… I told my broker that I can only think of two reasons why the warrants might be undervalued (negative to zero time premiums); the first is that the market thinks that the company is going to issue a special dividend (given to all but warrant holders) and the second is that the company has a hidden cost for the exercise of warrants. Apparently there aren’t hidden costs so what’s up here? Personally I’m now looking at the June 12th (?) ex-dividend date and may exercise some of my warrants before then. IMHO, if the company ever wants to do a share repurchase then they should seriously consider buying up their own warrants on open market. The lack of a time premium is crazy so the company should take advantage of that.

Sentiment: Hold

Thank you snotflier for the reply. The more I think about it the more I think about keeping the cash for other purposes until the company shows a need for cash. Right now I’m sitting on a bunch of warrants and they seem to be rising by five to ten percent per day (already up over 12% today). The dividend is pretty meaningless in comparison to those sorts of gains. In total I’m up over 225% in just a few months and that feels pretty good. I will probably convert my warrants to stock sooner rather than later, but only if it’s clear that there is an easy and inexpensive way to do so. For now, I’m happy knowing that both the stocks and warrants are rising. BTW, I started this thread because I think it’s rather silly that new investors aren’t purchasing the warrants and because the market is giving zero time premiums to the warrants. You have to admit that a 225% increase in a few months is a rather good increase when compared to a fifteen cent quarterly dividend… Of course, the problem with buying warrants is that a new investor might over do it and buy too many. When a bunch of warrants swing up or down the overall value makes big swings too (like 12% in one day vs 2.25% for the stock); we can’t keep having 12% up days so warrant buyers should beware. My recommendation for anyone considering the warrants is that they only buy as many warrants as they would stock and keep the remaining cash on hand for exercising the warrants in October 2014 or for rainy day emergencies between now and then.

I just realized that I should clarify something from my last post regarding the statement: “By the way, the fact that the options trade at zero premium to their time value may make them a safer investment than buying stock. Anyone buying ROIC right now is paying approximately $14.10 for their shares and therefore has $14.10 of potential downside should the company run into financial problems. On the other hand, anyone purchasing the ROIC warrant is paying $2.10 for roughly the same potential upside (minus the dividend) but their downside is limited $2.10.”

This statement is true provided the purchaser doesn’t over do it and purchase too many warrants. For example, if I had enough cash to purchase 1000 shares of ROIC at the current price of $14.17 (or $14,170 plus commissions) then it may be safer for me to purchase 1000 warrants via ROICW at a price near $2.17 (or $2,170 plus commissions) and keep the remaining $12,000 of my cash until I’m ready to exercise those warrants (presumably any time between now and October 2014)… On the other hand if I go crazy and invest all of my money in warrants, purchasing over 6500 warrants via ROICW, then my risk is much greater because if the stock price drops between now and October 2014 then I’ll lose nearly 6x more for each penny it falls… This is the risky side of warrants; people tend to overdo it and buy too many… It happens to the best of us when we see predictions that ROIC could rise to $18… In this case, the potential risk and reward is significant because if the price rises above $14.17 then the overly ambitious warrant holder will see a near 6x increase for each additional penny the stock runs. It is that potential that causes many an option buyer to pay a nice time premium for their options (even though a huge percentage of all options expire worthless).

arbiterofposts, you probably don’t trade options which is a good thing because 90% of all options expire worthless. Regardless, in the options world most traders are willing to pay a premium for time value due to their belief that the stock (and therefore the options) will increase in value over time (for instance my warrants doubled when the stock went from $13 to $14, the seller of those warrants should have asked a premium for them because the potential was definitely there). This usually fails because a lot of stocks move sideways or down over time so the buyer ends up with a worthless contract at the end of his/her time, BUT with quality stocks the tendency is for them to move up over time. Due to the potential for increased value over time, buyers usually pay a premium for their options (See Pandora Jan 2015 $12 for an example of a call option with time value that should trade similar to our Warrants)… Something with an 18 month timeline may have as much as a 15% to 30% premium on it. The warrants that we are buying here are nearly identical to normal options (both don’t collect regular dividends yet options may be re-priced to reflect special dividends); the main difference is we don’t have an easy way to exercise the warrants before the expiration date (FYI, in a way this is similar to options because most brokerages would rather buy your options from you for their time value rather than let you exercise them early).

By the way, the fact that the options trade at zero premium to their time value may make them a safer investment than buying stock. Anyone buying ROIC right now is paying approximately $14.10 for their shares and therefore has $14.10 of potential downside should the company run into financial problems. On the other hand, anyone purchasing the ROIC warrant is paying $2.10 for roughly the same potential upside (minus the dividend) but their downside is limited $2.10.

Personally I don’t believe we’ll see less than $13 per share again and believe

You are right, I could just sell my warrants and then purchase the stock outright, but as a shareholder wouldn’t you rather see the company get the cash difference now rather than 18 months from now? Recent exercising of warrants is part of the reason why the stock has moved from $13 to $14… The more cash Tanz has to work with the more investments he can make. I like the idea of giving him my cash now, but if it is impossible then I may take option 1 and sell the warrants then buy someone else’s shares… By the way, the warrants may have zero time premium yet my investments in the warrants is now up 128% thanks to people who didn’t see their value when the stock was trading below $13… I may not be enjoying dividend increases but the price increase has been pretty nice. It’s been a great way to keep my foot in the door without the big initial investment, but I’m finally ready to make that purchase and am looking for the best way to do it.