If you're bullish on Resverlogix as an investment for the longer term, then share purchase warrants may be something you want to consider. Resverlogix shares trade on the TSX under the symbol RVX, as do warrants under the symbol RVX.WT
I'm assuming most people reading this (all three of you) already know how warrants work. But for those who don't, or for those who are a bit fuzzy I will explain. Warrants are basically a futures contract, very much like calls. They give the holder of the warrants the right to purchase shares at a fixed price up to a specific date.
In the case of Resverlogix, their share purchase warrants give holders the option to buy shares at a price of $2.05 each and they expire in June of 2021, June 20th to be precise. Obviously for the warrants to have any value the PPS for Resverlogix has to be trading above $2.05, otherwise there's not much point. However because they don't expire for another three and a half years, there is the "time value of money" component which adds some value.
I'm going to demonstrate how warrants can outperform shares using Resverlogix as an example. The numbers I'm going to use come from the most recent day's trading, Monday December 11th 2017.
If you're going to buy warrants you should obviously be bullish on a company's longer term prospects. In the case of Resverlogix's warrants, they've got a long way to go before expiry, over three years in fact. In Monday's trading the PPS ranged between $2.07 and $2.47 so I'm going to pick the mid point, $2.27 and the warrants traded between $0.90 and $0.99 with a mid point of $0.945 so we'll call it 95 cents.
What makes more sense, buying shares for $2.27 or warrants for $0.95? If you don't expect the PPS to do much, then shares would be the better option. But if you read Dr. Kideckel's report for Beacon Securities and believe the 12 month price target of $8.55 is achievable, then the warrants are the better option. Here's a link to StreetWiseReport's story on that analysis.
Resverlogix doesn't even need for its share price to reach that $8.55 target for warrants to outperform shares. Let's cut that number by more than half, and put it at $4.
$10,000 invested in RVX shares @ $2.27 per would net 4,405 shares. At $4 those same shares would be worth $17,620 for a gain of $7,620 or 76%. Not bad.
$10,000 invested in RVX.WT warrants at 95 cents each would net 10,526 warrants. At $4 those warrants would be trading "in the money" by $1.95, so they would be trading at least at that price plus a "time value of money" premium. But to keep things simple we'll simply price them at $1.95 each. 10,526 warrants at $1.95 would net $19,500 for a gain of 95%.
Who wouldn't want an extra 19% return? And if Beacon's $8.55 price target is met, then the degree to which warrants outperform shares is even greater. The shares would be up 277% using a buy at $2.27 as an example. But the warrants would be up 584% because they'd be trading for at least $6.50, ($8.55 - the $2.05 exercise price).
Options trade just like shares, and just like shares you can either buy or sell them. If a warrant holder chooses he/she can exercise their purchase option and convert the warrants into shares. In the case of RVX hitting that $8.55 target price, the owner of 10,000 RVX.WT warrants would contact their broker and pay $20,500 plus fees which would then be forwarded to Resverlogix. The company in turn would convert the warrants into shares. And those shares would be worth $85,500 at that $8.55 price.
Full disclosure, I own both RVX shares and RVX.WT warrants. In the case of the warrants I expect I will simply trade them rather than convert if the PPS climbs as I'm expecting.
For those wishing to do further reading and research, something I wholeheartedly encourage, here's a link to a story from Canada's Globe&Mail, it was first written in March of 2011 and last updated in March of 2017.
Love reading your blog. How does one know if a stock has a warrant on the TSX or NYSE? Best.
ReplyDeleteFor example warrants for VKTX, a biotech am following.
ReplyDeleteI would simply check the filings on a stock you're interested in to see if there are any warrants that are trading.
ReplyDeleteCan you please tell me where you found the info on the strike price and the expiration date of the warrant?
ReplyDeleteI've been digging on the internet but can't seem to find anything...
My broker quotes the warrants as follows:
DeleteWTS RESVERLOGIX CORP06 20JUN21, here is the link to the PR related to the warrants.
https://www.resverlogix.com/investors/news?article=573
And here is the relevant section:
Each warrant is exercisable at a price of $2.05 per underlying common share for a period of four years from the closing of the offering.