SPACs

[Ronchong]

What do you guys think about the craze over EV /renewable recently? Everything that has to do with electric/renewable has been going through the roof lately, making Warren buffet returns look like an amateur.

 

Blink has gone up 3000% and now trade at a P/S, not P/E of 1000. Any spac that merged with an electric related company surged over a span of a few months (KCAC 110%, CIIC 150%). NIO, XPEV gained 12% and 33% on no news yesterday and both has been up at least 3 fold since the start of the year. Not to mention countless others names like PLUG, FCEL, FTEK that the market has left for dead years ago. Heck, even an ugly single seater electric car maker like SOLO has gone up four folds this year.

 

Everyone and their family and their dogs are piling into the sector. Is this the start of the next dot com bubble?

[Gregmal]

Bubble, yes. Looks very similar to previous blockchain and cannabis bubbles over the past half decade.

 

Still my favorite way to play is through pre deal announcement spac and even post announcement, pre deal close names as you still have a hard floor of $10. But yea, these arent good investments...with the occasional exception of course.

[Ronchong]

Not sure if this is of any significance but the bubble just seems to be getting bigger and bigger. Cumulative market cap of cryptos were at 700B at its peak. Now, just three companies alone, Tesla, NIO, XPEV, adds up to more than 700B market cap.

 

Agree, having said that, I myself am invested in a few SPACS (HCAC, THCB). They don't make for good long term investments but the risk reward of these speculative bets are too good to pass on with the price floor of $10

[Simba]

How do you buy SPACs to profit off of the EV trend?

 

I know these are HoldCos for the impending M&A tranasction but how do you make money

 

Buy Spac

Spac converts to common share (new ticker)

Sell new ticker for profit?

 

What if new ticker trades lower than $10 Spac price?

 

 

[Castanza]

I agree, the EV bubble is insane. Did not expect this to run up so fast.

 

My joke of a position is quickly turning from

 

"Hey babe, we can get a new range, dishwasher, and fridge."

 

To

 

"Hey babe, we can get a new range, dishwasher, fridge, tankless water heater, washer/dryer and possibly a new set of irons  :o"

 

I can't help but smirk at my NIO position ;D

[Gregmal]

Humble mans got the #2 trade Ive seen on COBF quietly and without much bragging. NIO at what? $1.50 I think you said, now at ....dont even know anymore as if goes up $10 a day but last I checked like $50 or something. Second only to this fella

 

https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/enph-enphase-energy/

[Gregmal]

Flirting with putting on a short FSR common and long the warrants pair here. Currently at ~$20 on the shares and warrants only at $5.30. Happens somewhat frequently with these names.

[Castanza]

Humble mans got the #2 trade Ive seen on COBF quietly and without much bragging. NIO at what? $1.50 I think you said, now at ....dont even know anymore as if goes up $10 a day but last I checked like $50 or something. Second only to this fella

 

https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/enph-enphase-energy/

 

Originally picked up 100 shares around $3.50

 

After my GOOG options play in May I said F it and added 400 shares at $17 end of August. Completely speculative position with really high risk, but hey I'm young and the EV boom is only going to happen once.

[Ronchong]

You have the mania market to thank for this. A lot of times, SPACs trade up on announcement of a merger not even the approval so you have plenty of time to sell out or redeem if things don't work out. E.g. CIIC is trading at $25 now even though the merger vote only happens in Q1 2021. The market's reception to the merger or even the rumours of an impending merger kind of give you a sense of where the SPAC would go.

 

It's kind of a no brainer since these are relatively riskless speculative bets (as long as you don't pay too much of a premium for the SPAC units) but each one has the potential to return multiple folds of your capital. I never thought I would say this but all these speculative bets are some of the best places to park your money currently. I  even sold off some of the value names in my portfolio to plow them into SPACs.

[Gregmal]

Yup. Had a decent little surprise the other day with INAQU. Only had a few thousand shares but still just highlights the power of the market. Had an investor, guys the biggest vagina in the world and up until US went 0 on rates in March, insisted on buying CDs with 90% of his wealth. Yes even at .75% for 24 months. He finally took my advice and we get a fair share of SPAC IPO, especially from certain syndicates. He put in for $50k on INAQU and got allocated for only 500 shares. This was September I believe. Sold yesterday for $12. He made more money in 2 months on a risk free $5,000 investment than he would have in 2 years on $200k....Today we took down some of the FRXU IPO. Also buying in open market LSAQ and SPNVU. These are beautiful.

[Simba]

You have the mania market to thank for this. A lot of times, SPACs trade up on announcement of a merger not even the approval so you have plenty of time to sell out or redeem if things don't work out. E.g. CIIC is trading at $25 now even though the merger vote only happens in Q1 2021. The market's reception to the merger or even the rumours of an impending merger kind of give you a sense of where the SPAC would go.

 

It's kind of a no brainer since these are relatively riskless speculative bets (as long as you don't pay too much of a premium for the SPAC units) but each one has the potential to return multiple folds of your capital. I never thought I would say this but all these speculative bets are some of the best places to park your money currently. I  even sold off some of the value names in my portfolio to plow them into SPACs.

 

So from my understanding, the idea is to buy around $10 (the floor), and sell in-between the announcement and closing date, correct?

 

Seems too be good to be true, what am I missing? The win rate must be very low, no?

 

[perulv]

Just like the dot com bubble, the underlying trend is imho "not wrong". Just like you were right if you thought "software is eating the world" in 1999, energy is going to be gradually decarbonised. And there are renewable-companies that make real money, and tick my quality-company-boxes (ROA, debt-levels etc). That said, I totally agree that most/all of these now seem to be very high priced. I have sold parts of my SolarEdge-position at several occasions over the last couple of years, and each time seen the price rise higher. While earnings have risen 4x ish since 2017, the price has risen 20x, bringing EV/ebit to around 70 or something. I keep looking for companies that will benefit from the increase in renewables (ideally in a sell-shovels-in-the-goldrush way) and are still reasonably priced, but that search has not returned much lately.

[Gregmal]

You have the mania market to thank for this. A lot of times, SPACs trade up on announcement of a merger not even the approval so you have plenty of time to sell out or redeem if things don't work out. E.g. CIIC is trading at $25 now even though the merger vote only happens in Q1 2021. The market's reception to the merger or even the rumours of an impending merger kind of give you a sense of where the SPAC would go.

 

It's kind of a no brainer since these are relatively riskless speculative bets (as long as you don't pay too much of a premium for the SPAC units) but each one has the potential to return multiple folds of your capital. I never thought I would say this but all these speculative bets are some of the best places to park your money currently. I  even sold off some of the value names in my portfolio to plow them into SPACs.

 

So from my understanding, the idea is to buy around $10 (the floor), and sell in-between the announcement and closing date, correct?

 

Seems too be good to be true, what am I missing? The win rate must be very low, no?

 

Yea, theres two ways to do it. The first is the least risky. Buy the pre announcement spac. You can get them very close to $10 buying right after they IPO. Your max duration is typically 18-24 months. There is an interesting dynamic to the warrants as contrary to conventional wisdom, they actually gain value as time goes by as people anticipate a deal announcement. So, just using an example, something like SPNVU, you can buy now for say 10.15. After its 50th day public or whatever, it can decouple. Which allows the speculators to buy the warrants. So between that and deal anticipation, you're going to see a bit of a lift to the units. With this type of situation I like to park short term cash here that I eventually plan to use for other things. You can pretty reliably trade these, all day long and clip .5-1% just on fluctuations, which beats the shit out of your cash. SPNVU you can buy at 10.15 and either add below there or peel off over 10.2 and just rinse and repeat. Max downside in absolute terms is $10 but realistically probably more like 0 given much of the above and other factors.

 

The second way, is to jump on a deal announcement or stalk existing deals. SBE for instance on first announcement traded 12/13. SPAQ fluctuated like heck and has been a trading bonanza. PIC you just had to follow and recently hugged $10 for a good while despite IMO being one of the more exciting and reasonably(within context) valued deals. I dont want to give away to much of the recipe but another very reliable trade is buying a small amount right at the close and then flipping it for a .5-1% premium after hours as the minions of Sherwood Forest reliably bid these up A/H.

 

Main thing is to just have a plan. But yea, it is kinda too good to be true. Ive rarely seen risk/reward setups like this.

[Spekulatius]

Isn’t  the risk with SPAC’s that they announce a crappy deal and the stock falls below par ($10)?

[Gregmal]

No because you have the option to redeem your shares for $10. From deal announcement, until deal close, thats part of the sponsor headache. Most who dont like it, cash out in the open market if the units are over $10, which they almost always are; lately, very much so. But even if the shares are sub $10, you have until deal close and can redeem them to the company for $10. Effectively, in a typical WS kind of way, to close the deal, everyone who owns the shares needs to be in favor of the transaction, rather than the typical 50% or whatever with most corporate actions. If the transaction gets nixed, between the IPO cash kept in trust, and the sponsor gap fill, all the units are is a shell company with $10 per share in it.

[Ronchong]

Just like the dot com bubble, the underlying trend is imho "not wrong". Just like you were right if you thought "software is eating the world" in 1999, energy is going to be gradually decarbonised. And there are renewable-companies that make real money, and tick my quality-company-boxes (ROA, debt-levels etc). That said, I totally agree that most/all of these now seem to be very high priced. I have sold parts of my SolarEdge-position at several occasions over the last couple of years, and each time seen the price rise higher. While earnings have risen 4x ish since 2017, the price has risen 20x, bringing EV/ebit to around 70 or something. I keep looking for companies that will benefit from the increase in renewables (ideally in a sell-shovels-in-the-goldrush way) and are still reasonably priced, but that search has not returned much lately.

 

Yeap, this is the problem. The market trades at such dizzy valuation that there's not much opportunities to deploy your capital. I have been looking into the lesser touched small/micro/nano caps lately and even there, companies have doubled and tripled from their pre-covid high.

[Ronchong]

Yes, Greg is right. The beauty of SPACs is not just in the reward but in the risk/reward. In a market where almost every junk stock is going up, SPACs offer you similar mania return but without any of the downside.

 

If you really want me to point something bad about SPACs, I would say it's the opportunity cost, which is a real cost in normal market condition but I don't think you are losing much in opportunities these days.

 

 

 

 

[Gregmal]

Little do most people know, but historically, the biggest holders of spacs are some of the most conservative institutions/hedge funds. Of course typically they were in it for the 3-5% over max 18-24 months that was common pre-mania. Upon decoupling they would offload the warrants to get their ~2-5% return and then wait out the common for either a deal pop or redemption where you'd get the $10 plus (time*prevailing interest rate).

[Gregmal]

https://spacinsider.com

 

The above is a great resource for anyone interested in these. Spacs are literally the playground where the sophisticated investor can rape, pillage and plunder the Robinhooder, while the Robinhooder to date, still seems to also do pretty well. No guarantees how this ends of course!

[neil9327]

Yes, Greg is right. The beauty of SPACs is not just in the reward but in the risk/reward. In a market where almost every junk stock is going up, SPACs offer you similar mania return but without any of the downside.

 

If you really want me to point something bad about SPACs, I would say it's the opportunity cost, which is a real cost in normal market condition but I don't think you are losing much in opportunities these days.

 

 

Yea, theres two ways to do it. The first is the least risky. Buy the pre announcement spac. You can get them very close to $10 buying right after they IPO. Your max duration is typically 18-24 months.

 

 

I guess one way to get around the opportunity cost, is to buy these $10 spacs on margin. Using cash raised against your existing equity investments by putting the latter on margin perhaps.

Are there any risks with doing this? I guess the key question would be: if there is a major market crash, will the price of these spacs drop significantly below $10? (thereby possibly creating a margin call forcing you to sell at a loss). In theory they should not because they are redeemable at $10 in all cases = risk free immediate arbitrage opportunity. But I don't know for sure.

 

[Gregmal]

Yea, that's basically what I do with the margin.

 

As to the potential short term downside, I've been doing these for years and typically hold about a dozen at any given time, although with the spac boom of late they are being issued much more frequently and currently I'm sitting on closer to two dozen. I think the March meltdown is as good a proxy as any. From the ones I held, the biggest intraday decline was to 8.99 and most was 9.80s. Most of those ticks were opening trades on big gap downs and not more than a couple hundred shares. By the close all were within a % or so of the $10 mark.

[Pelagic]

Yea, that's basically what I do with the margin.

 

As to the potential short term downside, I've been doing these for years and typically hold about a dozen at any given time, although with the spac boom of late they are being issued much more frequently and currently I'm sitting on closer to two dozen. I think the March meltdown is as good a proxy as any. From the ones I held, the biggest intraday decline was to 8.99 and most was 9.80s. Most of those ticks were opening trades on big gap downs and not more than a couple hundred shares. By the close all were within a % or so of the $10 mark.

 

How are you looking at weighting when it comes to holding a group of SPACs? If purchasing post IPO at around $10 is it worthwhile to put time into analyzing each or just allocate a certain % of the portfolio to SPACs and divide that by the number of SPACs you want to own.

[Gregmal]

There's  few aspects that you kind of have to assess on a personal comfort level but generally speaking:

 

1) no. It makes zero sense IMO to assess a spac IPO on an individual basis, at least in terms of when I look back at years worth of buying them. I do look at the prospectus occasionally for a few things, but there's been ones where Ive said to myself, this looks boring, and demand is great and the end result is good, and ones where I've thought, this one is really exciting, and its been a dud. Ive never seen one, period, that hasn't provided the opportunity for at least a 2-3% exit, usually within a couple months. Back in the day, a lot of the institutional folks would simply sell the warrants and then down the line redeem the shares. Warrant was considered your "profit". I think the same logic applies to post iPO. You're really just banking on the mechanics of time value on the warrants separating from the pile of cash. You can, such as recently with something like RBACU, IPOA/B?now C I think or SPNVU look at the headliners there and conclude that its probably a safe bet the thing gets a nice pop on deal announcement. RBACU I remember being able to buying for a few weeks at 10.1 or less. Same for SPNVU until a couple weeks ago. If you're in it for the risk free 2-5% then it doesnt matter. If you are looking for a kick ass risk adjusted speculation, you have to be a bit more diligent and willing to pay the premium; ie usually those are trading at 10.4-11 on the units. The big thing now is to look for anything tech or green new deal marketable and then hope for a deal. Although the market is adjusting in that now almost all the ones IPO-ing are with that focus. They used to be very diverse in terms of their purposes. Latin American Construction focused, Distressed Housing, Life Science Royalties, etc. Now the prospectuses basically just say "tech" or "energy" and when the acquisition is announcements its kind of a reach but nobody cares.

 

2) For allocation purposes its tough and personally I just look at my available liquidity. You can put in for $50k and get all of it, or you can get $5k filled. Depends on demand obviously. In open market, I kind of weigh what my overall allocation looks like and also what opportunities are there, along with time horizon. I have no issues dumping these on the spot if I find a real investment and need the capital. If you stay disciplined in terms of buying close to $10 you obviously have minimal downside and the rare instance where maybe you have better use for the capital and take a 1% loss is more than made up for elsewhere. You can also just kind of trade the fluctuations. If a ran a "vagina fund" as I refer to them, of mostly super conservative objective, I'd probably just trade fluctuations on spac as you can pretty routinely clip .5-1.5/2% just trading these back and forth on market and supply/demand fluctuations.

[Ronchong]

 

 

I guess one way to get around the opportunity cost, is to buy these $10 spacs on margin. Using cash raised against your existing equity investments by putting the latter on margin perhaps.

Are there any risks with doing this? I guess the key question would be: if there is a major market crash, will the price of these spacs drop significantly below $10? (thereby possibly creating a margin call forcing you to sell at a loss). In theory they should not because they are redeemable at $10 in all cases = risk free immediate arbitrage opportunity. But I don't know for sure.

 

It really depends on what your portfolio strategy is. If you are someone that would never utilise margin unless on SPACs, then yes.

 

However, if you are user of margin, the above does not really solve your opportunity cost problem. In this case, part of your pool of capital (principal + margin) just gets diverted to SPACs instead of things that you would buy normally.

[neil9327]

 

It really depends on what your portfolio strategy is. If you are someone that would never utilise margin unless on SPACs, then yes.

 

 

This is the case for me, yes. i.e. I will only use margin if I can be sure that the price won't drop significantly causing a margin call.

 

Now the thing that should provide a floor to the price ($10), is the redemption promise.

 

Doing some due diligence, there is one thing that concerns me:

 

https://en.wikipedia.org/wiki/Special-purpose_acquisition_company

says:

"Recent SPACs incorporated provisions that prevent public shareholders, acting alone or in concert, from exercising redemption rights in excess of 20% shareholding"

 

Looking at one example recent IPO (Duddell Street Acquisition Corp):

https://www.sec.gov/Archives/edgar/data/1823466/000095010320021018/dp139545_424b4.htm

says:

"our ... articles of association provide that a public shareholder, together with ... any other person with whom such shareholder is acting as a “group” (as defined under Section 13 of the Exchange Act), will be restricted from redeeming its shares with respect to more than an aggregate of 20% of the shares sold in this offering"

 

Isn't this a risk? Because let's say the company announces its merger, but the market doesn't like it and the share price fails to rise very much or at all, then could the company try to claim that you are in a "group", refuse the redemption, resulting in the price dropping well below $10?