Chris’ note: As regular readers know, we’re always on the lookout for asymmetric bets here at the Cut. These are high-reward, low-risk bets that can really move the needle on your wealth.
As colleague E.B. Tucker reveals below, there’s a special type of security that allows you to make asymmetric bets on stocks. He’s been recommending it at our Strategic Trader advisory for 12 months now. And so far, his readers are seeing gains of 129%… 264%… and even 979% in the model portfolio.
I caught up with E.B. to find out about these special securities, which he calls “Omega Shares.” As you’ll see in my exclusive Q&A with him below, you can use them to pick up exposure to stocks for pennies on the dollar. That makes them a great way to get in on the upside of the continuing bull market… while strictly limiting your downside risk.
Chris Lowe: There’s been a lot of excitement at Legacy Research about the profits you’ve been racking up at our Strategic Trader advisory.
It launched in February last year. Already, your top open recommendations are up 129%… 264%… and even 979%. And the average return is 108%. That’s almost five times the return folks would have earned investing in the S&P 500 over the same time.
You’ve done this through an obscure type of security 99% of Americans have never heard of. Can you reveal what these securities are… and how they allow you to earn these outsized profits over such a short time?
E.B. Tucker: Sure. I hosted a one-off online briefing about them last week. The special securities I use are known as stock warrants. They may not sound as exciting as cryptos… or options trades… or tiny biotech stocks… but they make for much better speculations.
You can pick them up for literally pennies… and the upside potential is huge. For instance, one of our warrants is up over 200% in less than a year, and another is up 100% in less than a month.
They’re perfect asymmetric bets. They have low downside risk and huge upside potential. And that’s what you want as a speculator.
Chris: We can get into more detail on why. But first, a quick definition.
E.B.: Warrants give you the right, but not the obligation, to buy newly issued shares in a company at a fixed price at any time during a fixed period. In simpler terms, they’re a better way to speculate on a company’s future.
Chris: You’re not going to read about warrants on Bloomberg or hear about them from the talking heads on CNBC. How did you first come across them? And why did they appeal to you as a speculator?
E.B.: I used to work at a fund that invested in precious metals mining stocks. While I was there, I bought a stock. I watched it shoot up from $1 to $3.
I thought that was a pretty good return. Then, I saw an investor move in and buy 1 million shares in the same company at 50 cents each. “Wait a minute,” I said to myself. “How did that happen?”
Turns out, this guy had bought a bunch of warrants in the company in a private deal before it went public.
The warrants gave him the right, at any time before the warrants expired, to buy the underlying shares in that company for 50 cents each. This guy may have done the deal two… five… even 10 years before exercising that right and getting his hands on all those shares…
When the stock took off, he struck gold. He exercised those warrants for 50 cents a share. This instantly bagged him a $2.5 million profit.
Chris: Why do companies issue warrants?
E.B.: To “sweeten the pot.” They want to incentivize new investment in their companies. Typically, this happens when a company isn’t doing too well… and it can’t raise sufficient funds through its regular shares.
Good examples are the banking industry in 2010, the gold mining industry in 2015, and the offshore-oil industry in 2017.
Or it can be a more specific situation. Let’s say you’re a relatively new company. Investors may be tempted to buy a million dollars of your stock at 20 cents or whatever. But they’ll want a reward for shouldering the risk of investing in a new company with uncertain prospects. In that case, the company might throw in some warrants to make that deal more attractive.
The company’s management team says, “We want you to buy our shares. But we know they’re risky. So how about we also throw in 1 million warrants to buy our new shares at $1 at any time over the next five years? If we’re wildly successful… and our stock goes to $3 or higher… you get to buy new shares at $1 and cash in on a windfall.”
Now, you don’t have to exercise a warrant and acquire regular shares to profit from them. Simply buying a warrant and waiting for the right time to sell it is often all you need to do to beat the market.
Chris: Why do you like warrants so much now? Why not just stick with regular shares?
E.B.: Warrants pay out better rewards… with less risk. What’s not to like?
When the stock market is running hot – like it is now – warrants matter more than ever. Let’s say you have $100,000 to invest. Do you want to throw it all into the S&P 500?
Right now, the S&P 500 is more expensive relative to underlying sales than it was during the dot-com boom. That means there’s a lot of risk in the market.
That’s what I love about warrants. They still give you exposure to the upside profit if the bull market continues… but for pennies on the dollar.
Imagine a stock is at $20… and there’s a warrant that gives you the right to buy a share at $25. You could probably buy that warrant for 25 cents. If you buy a thousand of those warrants, it will set you back $250. If that stock goes to $30, that $250 turns into $5,000. Talk about an asymmetric bet. You need only a small grubstake for the chance of a much bigger payoff.
Because warrants are so cheap, you might have just 10% of your $100,000 invested in warrants and the other 90% in gold, cash, and other less risky investments. This way, you’re not out of the game. If the stock market keeps going up, you’ll profit. If not, you’ve put only 10% of your funds at risk.
Chris: Can you give me a concrete example of a trade you made using warrants?
E.B.: Sure. Last February, I recommended warrants in an online mattress retailer called Purple Innovation (PRPL) to Strategic Trader readers.
Like its better-known competitor, Casper, Purple Innovation relies on TV and online advertising. The company ships the mattress directly to your house. And if you don’t like the mattress it sends you, it allows you to return it and get a full refund.
No one wants to go to a mattress store. It’s like buying tires. It’s not a pleasant experience. Purple Innovation eliminates the need for you to visit that mattress store.
It eliminates the mattress store’s profit margins, too. Purple Innovation can sell a bed for $1,000 that a brick-and-mortar store would have to sell for $1,500 to turn a profit.
In short, it’s a great business with lots of growth potential.
I had the choice to recommend Purple Innovation regular shares or warrants. At the time, regular shares were trading at $5.75.
The warrants traded for just 19 cents.
Right now, regular shares of Purple Innovation trade for $14.20. So they’ve more than doubled.
But over the same time, the warrants went up more than ten times.
That’s the best risk-reward profile of any investment in the market today… at least as far as I’m concerned. And at a time when the S&P 500 is near record valuations, you don’t want to be all-in on regular stocks.
Warrants let you ride the wave for upside while protecting precious capital from any nasty surprises.
Chris here – E.B. shared even more details about warrants (or, as he calls them, “Omega Shares”) in his special online briefing last week. But he did more than that. He also gave away for free the name of one warrant that he believes could rocket higher in 2020. And it’s as easy to buy as a regular stock.
If you want to learn more, just go right here to watch a replay.
February 12, 2020
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