While investors have watched the price of gold performing very well and recently trading over $1600, silver has lagged and lagged badly. This begs the question, are we overrating or expecting too much from silver and our silver miners?
Quite the contrary.........
Two other analysts that I follow are saying to be patient and that silver will be catching up soon, really soon.
Below I give my opinion on how to invest in silver, if these analysts are correct that higher prices are coming.
Chris Vermeulen at TheTechnicalTraders.com sees the possibility of silver trading upwards of $90 - $95 per ounce within the next 24 months. A move of that potential is surely worth waiting for, is it not?
"...Remember, the current disparity level is just over 200% between Gold and Silver. If Gold continues to rally higher and Silver attempts to break higher, attempting to narrow the disparity level, then Silver will (at some point) enter a near parabolic upside price move above $36 to $40. Our researchers believe this may happen before June or July 2020...."
Clive Maund - January 13, 2020 writing on Silver-Phoenix500.com:
"...Silver’s recent rally looks diminutive and stunted compared to gold’s, but that’s normal at this early stage of a new bull market, when silver typically underperforms gold due to investors being risk inverse, with silver being perceived as more risky and volatile than gold. Nevertheless,....."
HOW TO INVEST FOR MAXIMUM GAINS
With the possibility of gold over $3,000 and silver over $90, investors would have the opportunity of making a fortune, if correctly invested.
I suggest a portfolio of gold and silver miners as well as some stock warrants which are trading on shares of your favorite companies. This market environment would create many 10 baggers, 10 times or more for your investment dollars and the stock warrants would normally be at least twice those gains.
You will find many stock warrants trading on gold and silver miners in my databases.
This is the time to THINK BIG AND GO FOR HOME RUNS.
If you are not familiar with stock warrants, I invite you to visit my website and download your free copy of "The Stock Warrant Handbook, Your Personal Guide To Trading Stock Warrants."
Those subscribing to my Gold Subscription or LifeTime Subscription get access to my entire portfolio of gold and silver miners and the stock warrants which I own as well as my weekly audio.
"Marin Katusa and his team do an excellent job of marketing and presenting the views and justification for the continuing bull market in the resource sector. I basically agree with all of their views. I would suggest and I believe that Marin would agree, that investors should consider stock warrants which might be trading on any of the companies being considered for investment."
The Real Gold Bull Market Is Yet to Launch
The gold market has always moved in cycles—from dramatic boom to overnight bust, and eventually back again.
So far in this “boom,” gold has barely risen 20% from its floor.
That’s not even close to the minimum required to qualify for a true “bull market” over the past century.
The smallest gold run-up in the past 90 years was 45% from 1930-1933—more than twice the current gain.
The other rallies were far, far bigger: from 1972-1974, the rally yielded a 100% gain.
From 1978-1980, another 100% gain. Then from 2007-2010, a 67% increase in the price of gold.
The point is this: when gold is ready to rise, it takes off.
Every single one of the years in the date ranges above saw an increase of more than 20%. What some investors might see as slipping backwards may just be the cycle getting ready for its next natural advance.
So if you’re a subscriber to my Boom-Bust-Echo theory, then you know the gold rally has barely just begun.
The biggest profits still lie ahead of us.
Savvy investors will patiently hold, before finally selling near the peak of the boom.
For example, many major gold producers right now, such as Kinross, Gold Fields, Alamos, and Eldorado are trading around $5-6.
(Gold Fields is up nearly 190% from its lows 14 months ago – and that’s a $5 billion company!)
These stocks could easily be sitting at doubles a year or two from now. And the juniors’ percentage returns will likely be an order of magnitude greater.
It might be hard to believe that gold stocks could see gains of 500% or more in the next couple years. It was equally hard to believe in 1933, 1972, 1978, and 2007… but it happened every time.
Why Gold Is a Bad Investment When “This” Happens
During a gold rally, you might be tempted to invest directly in gold bullion.
There are many reasons why that’s not the best way to invest, including the persistent strength of the U.S. dollar. Have some bullion exposure.
But another really big reason is the potential for extreme leverage with gold stocks.
Look at what happened to gold in the ‘70s…
It took off early, cooled off a bit in the mid-‘70s, then hit the afterburners headed into the latter part of the decade.
On December 31, 1978, gold was at $226 an ounce.
On January 21, 1980, it maxed out at $850 an ounce.
That would be like gold going to $5,641 by the time the next U.S. President is inaugurated. If it happened forty years ago, it can happen again.
Now, digging up information on tiny gold producers from the early ‘80s is no easy task. Most of the information was not digitized then.
But here’s data we put together below on a few producers that the Katusa Research team found, along with the percentage returns at their peak:
Table 1. Gold Producer Returns, 1979-1980
That’s an average of a 220% gain.
The GDX, an index of gold miners, currently trades on the New York Stock Exchange for around $28. Keep in mind that the current gold rally has already begun—it’s up more than 37% from its low.
If gold plays out like the 1979-1980 rally, that would put the GDX Index at a cool $44.88 by the end of 2020.
Of course, it’s only the lucky investor that’s going to catch it right at the top.
But suppose you could capture 75% of those gains. That’s still a 165% return.
Buying into gold stocks instead of gold takes luck out of the equation. But we still haven’t mentioned where the real gains are to be had.
The ones that turn a modest portfolio into your whole retirement plan.
And how you can beat the GDX returns by over 200% or more…
The ones that make your 10% speculation bigger than the rest of your account.
Next week, I will reveal the kind of stocks that really move your net worth needle. And my team and I will see many of them front row center at the 2020 Vancouver Resource Investment Conference with over 350+ companies in attendance.
This year we have a world-class line up you don’t want to miss…
Peter Schiff, Lord Conrad Black, Ross Beaty, Raoul Pal, Grant Williams, Brent Johnson, Rick Rule, Frank Holmes and many, many more.
My team and I will have our boots on the ground on the conference floor and on the stage, interviewing companies and meeting with key management behind the scenes.
I’ve spent many years in this gauntlet and know exactly what to look for in a great opportunity and speculation.
I encourage all Katusa Research subscribers to attend if they’re in the area and to come say hello.
Happy Holidays To All and perhaps an idea for you heading into 2020.
There are many stock warrants trading on companies in the Precious Metals sector.
Perhaps you remember the name Precious Metals Warrants which we founded in 2005?
That was a great name at the time as resource companies and stock warrants on those companies did well, very well.
That time is here again as I anticipate soon, that gold, silver and mining shares and of course the warrants trading on those shares to rise substantially creating many 500% and 1,000% gains, perhaps much more.
In 2013 we changed our name to Common Stock Warrants as expanded our stock warrant database service to include all warrants trading in the United States and Canada and in all industries and sectors.
Many of my subscribers are primarily interested in the resource sector and currently there are many warrants trading on companies in the gold, silver, oil & gas and uranium space. Some are begging to be bought at current prices.
Subscribers to our Gold or Lifetime Subscriptions have much more information at their disposal, with access to my weekly audio and to my personal portfolio, “A Look Over My Shoulder”.
I follow the views and technical analysis of Chris Vermeulen at The Technical Traders and suggest you also visit their website and consider a subscription.
I look for 2020 to be a banner year for the resource sector with perhaps many 5 and 10 baggers, i.e., 500% - 1,000% gainers.
This week I want to explore how the junior sector operates and how it fits into the overall commodity puzzle. In order to do so, I will draw a direct analogy to the tech space. These two sectors independently represent the two most volatile markets in the world and surprisingly have a lot in common.
Let’s start with tech. In tech, there are a handful of companies that produce a majority of the sector’s profits and represent the lion’s share of the sector’s market capitalization. Think of Google ($GOOG), Apple ($APPL), Amazon ($AMZN), Microsoft ($MSFT), and Facebook ($FB) – the Giants.
Next down the totem pole are companies that operate on solid cash flow, but lack conglomerate status. They are less known and ultimately serve as unsuspecting lunch should one of the top dogs get hungry to acquire.
Further down still are the start-ups – companies built to solve a specific problem. Some of them are known, but generally they are obscure and most fail to produce anything that gains market traction or longevity.
Start-ups serve an indispensable function in the technology space. They feed innovative concepts and ideas that change the world. Almost every technological revolution stems from a start-up. They begin as an idea in the mind of an inventor, but ultimately become capital intensive and rarely generate profit until maturation. The potential monetary prize of these inventions, platforms, or apps is exponential and thus warrants serious attention from the Giants.
The technology ecosystem was not designed like this, but has naturally evolved this way due to market forces. Tech Goliaths like Facebook and Google are constantly investing in R&D, but they simply cannot justify allocating the resources to create 2,000 startups in hopes of finding one gem. And even if they did, start-ups are organic concepts – a result of an inventor solving a problem they often times personally encountered.
For these reasons, tech giants are forced to sit back and watch with a checkbook in hand. When a start-up emerges that they deem to be critically important, they are willing to pay massive premiums to acquire that technology. Think of Google buying YouTube or Facebook’s purchase of Instagram. In both cases, these acquisitions cost $1B and were thought ludicrous at the time due to a lack of profit. They now contribute as massive profit centers for both companies. Investors trying to value technology start-ups on cash flow, or lack thereof, possess a fundamental misunderstanding of the sector.
There is of course the rare case where a start-up makes it through the maturation phase on its own. Facebook was famously offered $1B by Yahoo, but declined the offer. Uber ($UBER) has not had a credible takeout offer and is now public, but a sustainable cash flowing model has yet to be demonstrated.
Moving to mining, there similarly exist a handful of companies that make up the majority of production and lion’s share of the sector’s market capitalization – Barrick ($GOLD), Newmont ($NEM), Zijin, Kirkland Lake ($KL.TO) are some of the names that come to mind. These are the Majors, analogous to the Giants of technology.
A Major’s core competency rests in mining gold from the ground. They do occasionally perform grass roots exploration, but for the most part, are focused on development and extraction. A Major’s share price acts as a direct lever to the underlying commodity. Higher gold prices equate to better operating margins, and translate into a higher share price.
A bit further down the ladder are the mid-tier producers. They effectively perform the same duty as the Majors, but on a smaller scale and as witnessed time and time again, they are lunch for a hungry Major. Last week’s acquisition of Detour Gold ($DGC.TO) by Kirkland Lake is a prime example.
At the bottom of the hierarchical pyramid are the juniors, loosely defined as companies with less than a $250M market cap (often times below $10M). Juniors are focused on exploring for the mines of tomorrow.
These companies are the lifeblood of the mining business – without them there would be no ounces to replace the depleting reserves at operating gold mines. Just like technology start-ups, most of them fail. As the saying goes, 1-in-3,000 targets becomes a viable deposit. Ultimately those are pretty bad odds and why the majority of juniors fail. It is also why most Majors cannot justify grass roots exploration – it would bankrupt their operations.
For argument’s sake, a 1-in-3,000 success rate might be applicable to not just the juniors, but also tech startups. Success in achieving that pinnacle of discovery (or market relevance in the case of tech) will translate into serious profit for investors.
But, aside from market/discovery success, there is a force at play that is equally as important and that is the cycle itself. In technology today, the start-up ecosystem is robust. Across the board, companies have access to capital on terms that are not terribly dilutive. This has led to the ‘unicorn’ nomenclature, reminiscent of the dot-com bubble in 1999.
During the dot-com bubble, money rushed into the sector without prudence or precision. The value of tech companies rose in tandem regardless of quality, and investors made a fortune. This created an epic market bubble. The sector overcapitalized, capital was misallocated, and the market ultimately burst. It took a few years to come back, but money did ultimately return. The next cycle peak occurred in 2008. Today, tech appears once again in the euphoric portion of the cycle.
Mining is even more predictably cyclical. Following the Bre-X scandal in 1996, mining began a precipitous decline. The tides turned in 2000 and began an eleven-year bull market (minus the 2008 crash). Then in 2011 the mining market shifted into bear market territory, steered by the underlying commodity prices. In 2016, as a reaction to extremely depressed prices, the mining stocks rallied. Today, they remain depressed. But, positive indicators have emerged such as a rally in commodity prices, matched by moves in the Majors.
I cannot stress enough how important this cyclicality is to the ecosystems for both technology and mining. In a speculative market where valuations of companies are not based on profit, but instead derived from anticipation of future results, extreme cycles will always exist. When a lack of solutions are being invented to aid in technological issues, money will eventually pour in to fix this. When a lack of ounces exists in reserve in the gold market, money will ultimately rush in.
Conversely, when technology start-ups reach ‘unicorn’ valuations across the board, it only takes one WeWork moment to scare investors away – a not so subtle reminder that the risk they are taking on no longer can be met with the asymmetrical gains their capital deserves.
In mining, when an abundance of ounces are put into reserves due to discoveries and higher commodity prices, investors will achieve smaller returns for taking on greater risks. Major mining companies begin to overpay for ounces. The value of all juniors reaches extreme heights. And at some point, investors shy away.
Differences between technology and mining do, of course, exist. And they are valuable to examine in the context of this discussion as well.
I once asked a well-known industry titan why someone with such a sharp mind would subject himself to the junior sector? Why not venture into oil & gas for example? He responded that competition is a lot lighter when you are scraping along the bottom of the junior mining barrel. Harsh words – but not far removed from the truth.
People often times lament the junior mining sector with its inefficiencies and lack of intellectual capital. But there is good reason for this phenomenon and it is not going to change anytime soon – 1) the size of monetary reward and 2) the lack of predictability.
In technology, the prize for a successful start-up can directly translate into a $10B or $20B cash take out. This can happen in a very short period of time – a couple years. Facebook bought WhatsApp for $19B in stock and cash with only 55 employees on staff and five years into operation. Ownership of technology companies tend to remain quite concentrated in the hands of the founders, meaning the prize is really, really big.
In mining, it is rare for a discovery to yield over $1B on a takeout. $10B is unheard of. These acquisitions happen a couple times per cycle, not a couple times per month like in tech. Furthermore, the mining business is far more capital intensive in context of the value created in the market and therefore the founders receive a much smaller slice. Money owns the mining exploration space, not the geologists.
All this translates into smaller monetary rewards. Since money attracts talent, it is no wonder intellectual capital concentrates in technology rather than mining. Geologists can spend a lifetime in search of a discovery to call their own; when they find it, they rarely own enough to build serious wealth.
The second point is regarding a lack of predictability. In the start-up world, guessing what is going to be successful and what will not is no easy task. But there are venture capitalists out there that demonstrate an ability to pick the right horse time and time again – Peter Thiel, Andreessen Horowitz, etc. In mining, this is almost non- existent. Robert Friedland has had two multibillion-dollar discoveries to his name. He is the only person alive with such good luck. For those who will debate me on this point, I will further clarify that he is the only person to ever do it and remain the majority shareholder.
The reason for this is that mining is a game of odds. You have to buy enough lottery tickets to get a winning hand. If you ever wonder why billionaire Eric Sprott invests in hundreds of companies, it is not for lack of discipline. He understands the game innately. First, he takes educated guesses, planting seeds with the right teams and right projects. Then when the sniff of a discovery comes along, he is first in line to deploy as much as he can. Wallbridge Mining ($WM.TO) is a textbook example.
This is the only systematic way to play the discovery game and why Eric is bound to go from billionaire to multi-billionaire status when the next cycle hits.
Conversely, technology requires concentrated bets. Typical venture capitalists in Silicon Valley make very educated bets and will deploy into just a dozen companies over a few years period. This ability to predict the next tech success with some level of accuracy attracts intellectual capital away from an unpredictable sector like exploration and towards the world of tech. This fundamental difference in concentration of bets and associated risks is why technology start-ups exist in the private space, while mining is almost exclusively in the public sphere.
The bottom line is technology and mining are capital intensive and they require a constant flow of new ideas and new reserves. Without the start-ups and without the juniors, the ecosystem is broken.
The relevance of a technological innovation depletes over time in the face of new ideas, different needs, and faster processing capabilities. A mining project’s lifespan depletes very literally as every ounce mined is one less left in the ground.
These two sectors – tech start-ups and junior miners – lack traditional methods of valuation that are based on cash flow. And for that reason, cycles will always exist to reflect human nature – too much capital, too little capital, but always in search of a balance. Ironically, both sectors are currently out of whack. Mining is experiencing a lack of capital while technology is facing the opposite problem – too much money can result in an imprudent idea like WeWork being given a $40B valuation. The below graphic nicely depicts the discrepancy in relative valuations between the two sectors.
This is why I said last week that in some way, shape, or form, an impending junior mining mania is coming and it is going to be exactly the same this time!
NOTE: This material is for discussion purposes only. This is not an offer to buy or sell or subscribe or invest in securities. The information contained herein has been prepared for informational purposes using sources considered reliable and accurate, however, it is subject to change and we cannot guarantee the accurateness of the information. The material does not necessarily reflect the official policy or position of Palisades Goldcorp Ltd.
Note from Dudley:
Gary Wagner writing on Kitco.com gives us his perspective on gold and the possibility of a bottom being in place. This is Part 3 and he provides links back to Part 1 and Part 2. If Gary is correct this would be a great time for you to make sure you are positioned in outstanding resource companies and/or the stock warrants trading on those companies.
I had the opportunity to visit for several hours with E.B. earlier this year. He is very passionate about his opinions and views on the markets, most of which I agree. E.B. Tucker is also a paid subscriber to my services at http://CommonStockWarrants.com. Perhaps you should also consider a subscription as well because I have many professional investors who want to know which stock warrants are currently trading along with the complete details.
I sat down for half a dozen media interviews earlier this year where I called for $1,500 per ounce of gold in 2019.
Now, the price has retreated a bit since, but gold’s still flirting with $1,500 per ounce, as I write.
Here’s why I’m writing you today: I believe $1,500 is only the beginning for gold.
I expect gold to take out its previous high of $1,900. That’s a 27% gain from here. And I expect that to happen in 2020.
In fact, as I told Kitco News recently, from there I see it hitting $2,200 – about a 47% rise from its current price of $1,492 per ounce.
Today, I’ll share why… and how you can start taking advantage…
A Major Gold Rally Is Underway
All of the serious money I’ve made investing came through positioning for a big move and sitting tight. Trading is tough. In and out all the time can work over a short period. But the big gains come from sitting tight and letting the bull market run.
After hitting an all-time high in 2011, the price of gold fell 45% to a low of $1,052 in late 2015.
While the Obama administration and the Federal Reserve experimented with radical money policies, gold stayed stuck. Notice in the chart above it didn’t do much after hitting its 2015 low.
What’s bad for gold is unbearable for gold miners. They commit to projects assuming they’ll sell produced gold for $1,500. Then it falls to less than $1,100. That means the project is bankrupt before it pours the first gold ounce.
That period is over.
I can give you a list of anecdotal evidence as proof. Several large mining firms combined this year in order to survive. These were not bidding war takeovers. CEOs got over their egos and merged to avoid losing their companies entirely.
Political dysfunction and ballooning deficits also set the stage for gold today. The three largest central banks in the developed world recently declared they’ll do anything to stimulate their economies. That’s central bank lingo for “create more money.”
But we need more than strong anecdotes to risk money on the gold sector.
From our view, that’s why the chart of gold is so important. It’s how I determined $1,500 was an important target for gold this year. If it hit that target, which it did, I felt it was a green light to invest more aggressively for higher prices.
The gold chart below goes back to 2014. Notice that after gold hit its low in late 2015 (circled in red), each rally that followed registered a higher low. The pullbacks of 2016 and 2018 (also circled in red) each hit low points higher than the last. To us, this meant it was a matter of time before gold exploded higher.
Breaking $1,500 was the first test. Now, I expect it to correct, which is market speak for rest and get ready for the next leg higher.
That next move for gold will catch mainstream asset managers off guard. As I said above, I expect it to eventually take out its 2011 high. That’s why the current pullback in gold is the perfect time to position for what may come next.
If you haven’t already, the first step is buying some physical gold. If you’re new to gold, start with common 1-ounce coins like the ones offered here by Gainesville Coins.
(I asked Gainesville Coins to create this page as a starting point for Casey Daily Dispatch subscribers who are new to physical gold. We do not receive any compensation from Gainesville Coins for bringing you this offer.)
After owning physical gold, you should consider speculating on select mining stocks, which can provide leverage to a rising gold price.
Let me explain…
Gold Mining Stocks… and the Power of Leverage
The word “leverage” usually means borrowing. That’s not the case at all in the gold market.
If you aren’t familiar with the concept of leverage in gold stocks, here’s a quick example of how powerful it can be…
Say the price of gold rises from $1,300 to $1,400. That’s roughly an 8% gain. If you own physical gold, you’re up 8%.
Now, say a mining company owns a million ounces of gold in the ground, and gold is trading at $1,300. The value of the gold in the ground isn’t simply $1.3 billion (1 million ounces x $1,300 per ounce). Instead, the gold in the ground is worth much less than that, because it will cost a lot of money to extract.
Say it costs the company $1,250 per ounce, all-in, to mine the gold. At a gold price of $1,300, the company has a potential profit of $50 on each ounce of gold.
However, if the price of gold rises only 8% to $1,400, the company’s profits per ounce increase by 200% ($1,400 – $1,250 = $150 profit per ounce). This small move in gold can cause the stock price to increase 40%, 50%, or more.
This is why a small increase in the price of gold can cause a gold stock to soar many times that amount.
It’s happened before…
Gold producers boomed during three separate cycles when gold surged: 1979-1980, the mid-1990s, and 2001-2006.
First up, the king of all gold bull markets: 1979-1980…
Gold more than tripled during this period. But gold stocks more than quadrupled.
Returns of Producers From 1979-1980
Sept. 1980 Peak
Campbell Red Lake Mines
Giant Yellowknife Mines
This wasn’t the only time gold stocks ran further than gold itself…
There was another boom in the 1990s. The average gold producer went up more than 200%…
Cambior rose 124%. Kinross Gold returned more than 190%. And Manhattan Gold & Silver skyrocketed over 760%.
All while gold only rose 8%.
Then, another big boom hit from 2001-2006.
Gold returned 158%, while the average gold producer gained over 400%.
Newmont shot up 270%. Gold Fields soared over 500%. And Goldcorp returned over 800%.
As you can see, an increase in the price of gold (even a small one) can lead to huge returns.
Now’s the Time to Take Advantage
You don’t want to be sitting on the sidelines while the motherlode of all gold rallies gains momentum…
Remember, before owning a gold stock, it’s wise to have some physical gold.
Then, you can speculate on higher gold prices by buying gold miners, which gives you the chance to multiply your money in a gold bull market.
You can look into an exchange-traded fund (ETF) like the VanEck Vectors Gold Miners ETF (GDX), which holds a basket of gold stocks.
But the best way to take advantage is by following our advice in my newsletter Strategic Investor. In our core portfolio we have a world-class gold miner that shot up 56% during gold’s move from May to September of this year. This is no penny stock. This multibillion-dollar miner turns a profit and pays a dividend.
The same goes for silver. Our top pick surged 83% over the same period. It too pays a dividend.
In short, now’s the time to strike before gold really takes off.
Just remember, gold stocks are extremely volatile. Like in any industry, the stocks of stronger companies will go up more than those of the weaker ones. As always, never bet more money than you can afford to lose.
It only takes a small stake in the right companies to make a fortune as gold prices rise.
Better than options, better than shares, better than preferred shares and better than convertible debentures.
Some others in the business have referred to these securities as Premium Shares, however, there is no such thing as Premium Shares which was a ‘made-up’ term by others for marketing to their base.
These securities are actually stock warrants which have been around since the 1920s.
Stock warrants are a favorite of many large and savvy investors, like Warren Buffett and Rick Rule, both of which would never participate in a financing unless warrants are issued to them as well as the common shares of the company.
For investors, ‘timing’ is extremely important, when to buy, when to sell. It is like a merry-go-round and each investor is in control as to when to enter or exit a trade. With stock warrants I usually like to have at least 2 years of remaining life before buying the warrants and there are many in my databases.
So warrants can be viewed as an equity kicker, incentive, to get the deal done and Warren and Rick are tough negotiators and want the best terms possible.
Admittedly, most of the warrants which Warren Buffett and Rick Rule receive are in connection with private placements which might not be available to the average investor, but there are many stock warrants trading which can be bought on the exchanges just like buying common shares but only if you know where to go and what to do.
In the United States, stock warrants trade on the NYSE, NASDAQ, AMEX and the Over the Counter Market (pink sheets). In Canada, the stock warrants trade on the (TSX) Toronto Stock Exchange, (TSXV) Toronto Venture Exchange, (CSE) Canadian Stock Exchange and the (NEO) NEO Exchange.
Our website // http://CommonStockWarrants.com provides investors several different levels of subscription, all of which give you access to our ‘one of a kind’ database of stock warrants as well as possible access to Dudley's portfolio and weekly audio.
Numerous investment professionals are subscribers to these services including E.B. Tucker of Casey Research.
E.B’s Comments: E.B. Tucker with Casey Research, recently referred to Dudley as 'the top expert in the field with over 40 years of experience' with stock warrants.
“I also encourage you to check out the work from our friend Dudley Baker. Dudley is the founder and editor of Common Stock Warrants. He’s been trading warrants for 40 years and has developed an exclusive database of all stock warrants trading in the U.S. and Canada. We’re paid-up subscribers as well”.
I just stumbled on this article on the Stockhouse website and thought it worthy of bringing to your attention as it is always good to see others writing about warrants besides myself. While I would take exception to one or two points in the article, basically it is a good article and useful to all investors.
Warrants (“share purchase warrants”) are a financial instrument that can be an important tool for boosting investment returns. For novice investors, this begs the question: what is a warrant?
A warrant is a form of stock option that comes into existence most commonly via the private placement process (for further general details here, please see Private Placements 101). Typically, when a company offers a large block of shares to finance a private placement, participating investors also receive share purchase warrants as an incentive for participation in the financing.
The most common structure in these private placements is for ½ of a share purchase warrant to accompany each common share (each “unit”) purchased in the private placement. Occasionally, companies will offer a full warrant with each common share.
These share purchase warrants entitle the holder to acquire an additional common share at a fixed price (known as the execution price), for a fixed period of time. The way that investors can prosper from the acquisition of these warrants is simple. If the share price for the offering company rises above the execution price of the warrants, then investors can exercise these warrants (i.e. convert them into new common shares) at a price below which they can purchase the same shares on the open market.
The exercise price on warrants is almost always significantly higher than the unit price in the original financing. Thus, for investors to be able to capitalize on their warrants, the issuing company’s share price needs to rise high enough to exceed the exercise price. And this needs to occur prior to the expiration date of the warrants.
For this reason, investors should pay close attention to the “warrant life” (the length of time until expiry) of these share purchase warrants. “Long-life warrants” (those with a multi-year time horizon) obviously offer much greater potential for an investor to prosper because there is much more time for the share price of the issuing company to rise high enough for the warrants to be “in the money”.
However, this is not the only way for investors to acquire (and prosper from) warrants. With some larger financings where an enormous number of warrants come into existence (typically in the millions or tens of millions), the issuing company can choose to have their warrants listed on a stock exchange – and thus become tradeable just like common shares.
Here is where the leverage of warrants enters the picture for more sophisticated investors who are interested in buying warrants on the open market. A numerical example will exhibit how this leverage works.
Suppose Company A does a large financing. A total of 20 million new common shares come into existence, and along with those common shares are 10 million share purchase warrants. To make things simple, at the time of the financing, the unit price for common shares is $1 per share (with ½ share purchase warrant) and Company A is currently also trading on the market at $1 per share.
Company A sets the exercise price for the warrants at $1.50, with the warrants being valid for a period of two years from the date at which the financing closed. Obviously, with shares trading at $1.00, there is no incentive to list the warrants for trading as no one would be interested in acquiring these warrants when the share price is well below the exercise price.
Now suppose the share price for Company A quickly rises to $1.50 per share and Company A decides to list its warrants for public trading. Imagine you are an investor wanting to acquire a position in Company A at this time.
You now have two ways to acquire a position. You can choose the most common route of simply purchasing Company A’s common shares at the market price of $1.50 per share. Or, if you’re wanting to increase your leverage (and take on a higher level of risk), you might want to buy some of Company A’s warrants.
Note thatat $1.50 per share, Company A’s warrants will trade at a price substantially above zero. This reflects the speculative value/leverage potential of these warrants. For hypothetical purposes, assume that warrants can be purchased at $0.25 at this time.
If you buy shares, obviously you’re starting your investment even: your shares are trading at the purchase price. If you bought warrants instead, however, you would effectively start -$0.25 in the hole. This is because the share price would have to rise to $1.75 in order for a warrant investor to be able to break even by buying the warrant and then exercising it ($0.25 + $1.50 = $1.75).
Now let’s suppose that the share price rises to $2.00 per share. The investor who bought shares at $1.50 has made a 33% gain – not bad at all. But have a look at the warrant-holder who bought warrants at $0.25 and was originally down on his/her investment.
At $2.00 per share, the investor’s warrants are now clearly “in the money”. The investor can exercise those warrants (at the exercise price of $1.50) and still be ahead of the game versus simply purchasing more shares on the open market.
However, assuming the warrants still have significant life before expiry, this investor would probably do much better by selling those warrants on the open market. Consider.
If the warrants were trading at $0.25 when the share price was at $1.50 (a fairly normal premium), what will be the open market price for those warrants with the share price at $2.00? Obviously, the warrant price would likely be at least $0.75, meaning the warrant-holder could sell the warrants having tripled his/her investment, versus the 33% return from buying common shares.
In fact, at $2.00 per share Company A’s warrants would likely trade even higher than $0.75 reflecting a higher premium due to the much lower level of risk, since the warrants are already in the money.
The obvious risk in trading in warrants is if the share price of the offering company does not rise and the warrants never become profitable. This means that (unlike common shares) there is a much more substantial risk of warrants falling to zero than with respect to the shares of any publicly listed company.
For this reason, trading in warrants is an activity for more sophisticated investors. Investors not only need to carefully evaluate the fundamentals of issuing companies, they also need to be highly cognizant of the lifespan of the warrants and be confident in their assessment of future market conditions. It’s only when all factors are favorable that prudent investors will want to speculate in the trading of warrants.
I dare say that every parent, grandparent, aunt and uncle, everyone, has been to a Chuck E. Cheese somewhere in the world.
Chuck E. Cheese will soon be completing a merger with Leo Holding Corp., a blank check company, sometimes referred to as a Special Purpose Acquisition Corporation - (SPAC) which will allow CEC to become a publicly traded company. Upon the completion of this business combination, the new name will be Chuck E Cheese Brands, Inc. and new symbols will be issued for trading.
Leo issued a press release announcing that it has scheduled the extraordinary general meeting of its shareholders to approve the Business Combination for July 30, 2019. However, I caution investors, until this merger is finalized issues can still arise, and until the deal is done, the deal is not done.
Leo Holding Corp. currently trades as LHC on the New York Stock Exchange as do the stock warrants which trade as LHC.WS.
Soon investors will have another restaurant and entertainment company trading which might represent an attractive opportunity depending upon your personal investment objectives.
My fascination and purpose in writing this article is that Leo Holding Corp. has stock warrants trading which will become stock warrants of the new company which may be of interest to many investors.
Currently in our databases, there are 66 blank check companies trading and with each company there is a stock warrant trading which was issued in the initial offering of the blank check company. All of these 66 companies are seeking merger candidates.
The stock warrants have a life of 5 years from the date of the merger which in effect gives holders of the warrants a 5 year call option and a wonderful opportunity to benefit from the upside performance of the company.
The exercise price of these stock warrants is $11.50 and one warrant buys one common share.
While the deal is not yet completed, the current trading price of the common shares is $10.26 and the stock warrants $1.20.
The stock warrants appear to be an interesting way to participate in the growth of Chuck E. Cheese and at a substantially lower entry price of approximately 90% less than buying the common shares and with great upside leverage possibilities. A win-win situation.
Upon the closing of this transaction, new stock and warrant symbols will be issued.
About CEC Entertainment, Inc.:
"CEC Entertainment. Inc. ("CEC"), headquartered in Irving, Texas, was originally incorporated under the name ShowBiz Pizza Place, Inc. In 1998, the company changed its name to CEC Entertainment, Inc. Today, CEC is the nationally recognized leader in family dining and entertainment with both its Chuck E. Cheese and Peter Piper Pizza venues.
CEC Entertainment, Inc. is the nationally recognized leader in family dining and entertainment with both its Chuck E. Cheese and Peter Piper Pizza venues. As America's #1 place for birthdays and the place Where A Kid Can Be A Kid®, Chuck E. Cheese's goal is to create positive, lifelong memories for families through fun, play and delicious handmade pizza. With the first-of-its-kind gaming experience, All You Can Play, kids have access to play every game at Chuck E. Cheese, as many times as they want on any day, without any restrictions. Committed to providing a fun, safe environment, Chuck E. Cheese helps protect families through industry-leading programs such as Kid Check®. As a strong advocate for its local communities, Chuck E. Cheese has donated more than $16 million to schools through its fundraising programs and supports its new national charity partner, Boys and Girls Clubs of America. Peter Piper Pizza features dining, entertainment and carryout with a neighborhood pizzeria feel and "pizza made fresh, families made happy" culture. Peter Piper Pizza takes pride in delivering quality food and fun that reconnects family and friends. With a bold design and contemporary layout, an open kitchen revealing much of their handcrafted food preparation, the latest technology and games, and beer and wine for adults, Peter Piper Pizza restaurants appeal to parents and kids alike. As of December 30, 2018, the Company and its franchisees operated a system of 609 Chuck E. Cheese and 141 Peter Piper Pizza venues, with locations in 47 states and 14 foreign countries and territories. For more information, visit chuckecheese.com and peterpiperpizza.com."
About Leo Holdings Corp.:
Leo Holdings Corp. is a blank check company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses.
The Company is again reiterating its annual guidance that was referenced in the investor presentation related to the definitive business combination agreement with Leo, which includes the following:
Total revenues of $929 million;
Comparable venue sales growth of 4.2%;
Adjusted EBITDA(1) of $187 million;
Four net Peter Piper Pizza openings and 11 net international franchised Chuck E. Cheese openings; and
Capital expenditures of $95 million to $105 million.
Second Quarter and Year-to-Date 2019 Sales Results Comparable venue sales increased 0.4% in the second quarter of 2019 and increased 4.5% in the first half of 2019. “We generated our fifth consecutive quarter of comparable venue sales growth due to the positive impact of the All You Can Play game packages and More Tickets initiatives and despite the estimated 1.8% negative impact from the shift of Easter and the corresponding timing of Spring Breaks in the second quarter 2019 versus the first quarter 2018.
Through the first half of 2019, our comparable venue sales growth was an impressive 4.5%,” said Tom Leverton, Chief Executive Officer. “Looking ahead, we are re-affirming the annual guidance that we first laid out in April. Our team is doing a solid job of advancing the Chuck E. Cheese brand through planned initiatives while simultaneously further improving the guest experience. We continue to be pleased with the results of our venue re-imaging project and are on track to complete the targeted 60 venue remodels in the back half of this year.” As of June 30, 2019, the Company’s system-wide portfolio consisted of:
Chuck E. Cheese’sPeter Piper PizzaTotal
Total Company operated 516 38 554
Domestic franchised 25 61 86
International franchised 6842110
Total 609 141 750
Complete financials can be found on the company’s website.
Investors are encouraged to perform your own due diligence and/or seek the advise of your financial advisor before buying any shares are warrants.