The Loot Boxes of Stocks

I fell in love with SPACs in 2020.

It’s true, I’m a long term passive investor but SPACs just have something about them that draws them to me. They’re an interesting investment vehicle that’s grown in a big way in 2020 in an investing world that’s constantly evolving.

While I am a long term passive investor, my investment plan allows for 20% of my money to be allocated to active investments and SPACs have been one of the best forms of active investments in the last 6 months. It’s honestly crazy how easy it’s been to make money via SPACs in the last 6 months and while that’s been true I’m not sure that can last much longer.

After the March recovery and some profit taking in my active account, I found myself sitting on about $30k in cash to invest. That’s when I took a closer look at SPACs.

I had already had some experience with them after picking up DEAC which later became Draft Kings, a successful investment but wanted to dive into them more. The appeal of a relative level of safety(if bought near net asset value) and a significant upside was enticing in a market that seemed to be heating up.

Long story short, it became a quick love affair and now I’ve tripled my money in one of the easiest investment environments I’ve seen in quite some time. Of course, the same could be said of most investments these days but honestly, SPACs have been an absolute can’t miss the last few months.

I loved them in 2020.

However, I’m not so sure I love them as much going into early 2021.

If you’re not familiar with SPACs, they’re basically an instrument to take a private company public while avoiding the traditional IPO process.

A SPAC(special purpose acquisition company) sells units to investors to raise a certain amount of money. These units contain common stock and warrants to entice investors and they eventually split into their individual components both trading on the stock exchange like any other stock. Warrants act much like options giving investors the right to buy more shares at a certain strike price in the future and since they trade on the exchange just like the stock, can be a low cost way to get exposure to the SPAC. However, they are much more volatile but also more likely to produce high returns.

Once split, the SPACs common stock trades on the exchange just like any other stock until they acquire a company and start trading on the exchange with a new ticker reflecting said company.

Simple right?

Most SPACs start with a $10 price point(some rare ones differ) to reflect the cash held in trust within the ticker while the search for a company takes places and usually have around 24 months. If they can’t do so, they return the cash to the investors in which case the SPAC dissolves and the warrants become worthless.

In essence, from the perspective of an investor, a SPAC is a holding company that holds nothing but cash they can uses to acquire another company. That’s why they’re often called blank check companies because initial investors are giving them money to buy something unknown.

In simpler terms, investors give management some money and say, “hey find something that will be worth more than the $10 we gave you and if you don’t within a certain time period, give us that money back minus bank fees, transaction costs and interest.”

While that give back protocol exists, it rarely happens as most of these blank check companies are incentivized to find something.

Why would a company pick a SPAC to go public?

SPAC IPOs are usually much quicker and a lot less cumbersome to the acquired company than the alternatives. For example, as a company going through a SPAC process, you don’t have to release any historical financial results or detailed asset reporting which makes it a really attractive option for companies that don’t have a ton of history and ones that want to raise cash quick without a lot of scrutiny. On top of that, recently SPAC valuations have been quite have and have allowed companies who might not have gone public for a few years to accelerate that and invest in their business(or cash out).

SPACs have generally been a minor player in the IPO space but they exploded in 2020 as a means of raising money. Between 2017 and 2019, 139 SPACs raised $33B in funds whereas in 2020 alone, 248 of these entities raised $83B. We’re barely 20 days into 2021 and there’s already 53 new ones with proceeds exceeding all of 2019.

As of today, there’s over 274 SPACs searching for a target. It’s become a big market which drives plenty of options for investors looking to invest in SPACs.

There’s certainly a lot to like about SPACs but a lot of negatives too that one has to be wary when investing.

Why I Like SPACs

I like SPACs cause they made me money in 2020!

Well, that’s part of it. The reality is that SPACs have been a FANTASTIC short term investment in 2020 and have really been a boon to investors who found them early on. However, it’s important to know that the short term returns of any particular SPAC differ from the long term return but more on that later.

While I loved 2020s in 2020, they’ve started to become a lot less enticing toward the latter part of the year and going into 2021. I’ve still got exposure to a variety of them and hold a few that have already made deals but my purchases have slowed down considerably in the last few months.

In my opinion, the value environment of these investments has certainly gotten a lot more difficult for investors and presents a lot more risk than it did just a few months ago.

First, let’s talk about why SPACs can be an enticing investment.

SPACs have two factors that make them a very good trade, at least in the short term.

Remember, that SPACs generally list at $10 and often start as units that include both a common share and a portion of a warrant. Most units will have something like 1/3rd warrant you get with each share upon splitting to entice the investor.

If you can get into these units at or close to $10 you’re doing pretty well. That’s because of how SPACs work.

The big component is that you can generally cash out your funds if the deal isn’t to your liking which limits your downside. That’s a big deal because if you can buy something at $10 and set a floor at $10 then all you can deal with is the upside. Now this floor is only there until the merger vote and disappears after which is why SPACs often work best in the short term.

Next comes the upside. SPACs often get a rally on any announcement which can lead to a significant upside.

Historically, the bull case with SPACs is that you can pay close to $10, wait for a deal and get your cash back if you don’t like it while also retaining the upside if the deal is to your liking.

This isn’t always true and can depend on the entity you’re investing in but the upside to downside ratio in the early part of the 2020 SPAC mania was pretty good and allowed me to more than triple my money in a short period of time.

The key part of those returns have been the mania surrounding the SPAC market which largely targeted EV, fintech, technology and other hot industries. Almost any mention of any of the next hot industries have caused SPAC prices to soar.

However, even beyond the recent great returns, the main reason why I like SPACs is simple.

SPACs are mini IPOs but with one key difference; they actually allow me to participate in it.

Solid IPOs have generally been a good source of returns for many but excluded the individual public investor. Sure bankers and insiders can get in at the IPO price but investors have no chance in hell unless they have a huge amount of starting capital.

IPOs like Snowflake and Unity Software are companies I would have liked to own at IPO price but they were up 100% over IPO price when trading opened. In essence, the IPO process is not democratic and shuts out the majority of investors.

On this reverse side of things, SPACs offer me the ability to participate in ownership of a company at a potentially reasonable valuation with a few downsides to the IPO process. The potentially reasonable valuation is key to this whole thing and really divides the line of why I loved SPACs in 2020 but am less enthused by them going into 2021.

The reality is that the recent overperformance of SPACs has garnered the attention of a lot of investors making the interesting trades that could be had last year harder to come by. After all, a SPAC is a holding vehicle for $10 in cash until they find something to purchase.

In the last few months, I was able to buy many pre-deal SPACs with good management close to that net asset value(NAV) and wait for a deal. If I’m buying something for $10.15, my downside is pretty limited and my upside can be pretty good if the deal is solid.

My strategy was simple; buy near NAV especially when dealing with SPACs with good management pedigree and ones that are a bit older and closer to a deal, hold till a deal is announced and sell if I don’t like the company(or hold forever if I do). This was pretty easy to do in 2020 before the whole world knew about SPACs and made for a lot of fantastic trades.

Even if I wasn’t able to get a certain company near NAV, often the post-deal bounce wasn’t too huge and still allowed for a lot of upside if the company was good.

I was able to get into solid companies many of which I’ve known about and wanted to invest in if it was possible. That includes Draft Kings, SoFi, Lion Electric, Genius Sports Group, Paysafe and a few others. SoFi is a good example of a company I like and use where an IPO process would have shut me out of the initial pricing but I was able to get in on that IPO pop because I owned it through a SPAC that acquired it.

Often these companies are certainly not household names but that’s the beauty of SPACs, they allow you to find diamonds in the rough before the rest of the market finds out about it because it is going through this oddball process that not everyone knows about.

If you’re the type of person who reads through S-1s(what these entities file when going public), can understand the level of dilution that may be present in a deal and do a lot of research on the management involved, SPACs can be a gold mine of good investments.

That was true in 2020 but it’s becoming less and less true today because the pricing dynamics have changed.

The main issue is that pre-deal SPAC prices have trended up. Finding a SPAC trading at less than 10% above NAV is harder than it should be. There are SPACs I bought last year that are up 30-40% from when I bought them BEFORE announcing a target.

While this has been true in the past, SPACs now more often jump a ridiculous amount on a rumor of anything happening and getting a good price post-deal announcement can be hard. CCIV’s rumor on Lucid Motors is a good example as the stock is up 80% before a deal is even confirmed.

I believe part of this is increased involvement from bigger investors who can get in on the ground floor(buy units at $10) and flip for a quick profit due to the heightened retail demand. It’s an easy trade to make if you can buy something at $10 then sell it right away for $11.50 when it opens to retail investors.

People are often paying $1.3 for each $1 in cash a SPAC holds simply because other SPACs have done so well.

PSTH, one of the larger blank check companies out there and one with possibly the most fame since it’s led by Bill Ackman, trades at a 48.6% premium to NAV. That’s pretty nuts!

This makes these investments a lot harder to make than they were in 2020 and A LOT more risky. I bought PSTH one close to 10% above NAV because it was structured in a very favorable way to investors and has great management and even then I felt like I was making a risky play when I bought it. Now it’s nearing a 50% premium to NAV and there’s still no target.

In 2021, I’m no longer paying a 2-3% premium to the cash held on most SPACS. I’m often paying 20-30% premium to the cash held for ones with good management so my downside is a lot bigger. That just doesn’t make much sense to me anymore.

There are certainly still deals out there to be had but the reality is that a lot of the popular SPACs with good and known management are trading at very high premium. Recently launched UNITs START trading at 20-30% above NAV even though deals are likely months or potentially a year+ away.

That means people are willing to pay a 20% premium because they think once a deal is found the stock will trade much higher than that. With 270+ SPACs trading and more coming, that’s a risky proposition and makes me wary about buying into the hype until things get a bit more reasonable again.

Yes, SPACs have done well in the past 6+ months but can that continue? Anytime, such easy money exists, risks start to arise and bad investment decisions start being made.

Why are people willing to be this aggressive? Well, it’s just like any other thing, greed drives excessive risk taking and I can totally understand.

Even though, it’s not a huge amount of money, I’ve more than tripled my initial investments.

The obvious concern with this type of strategy long term is that eventually the gravy train will end and people will lose their shirts. I totally expect to be true eventually and will discuss why in a second.

Since I’m a risk averse investor, I’ve taken quite a bit of profit and for companies I like long term, I know hold some positions at no cost basis(meaning I sold around half at a 100%+ return). The strategy that has worked for me has been to take profits often and return to investing near NAV but that’s become harder in 2021.

It’s been a very easy ride so far. Some of my investments have more than tripled in value and I’ve yet to lose money on any investment.

That’s how easy this game has been recently. Buy near NAV, wait for announcement, sell and repeat.

That’s good for short term trading but can it be good for long term returns.

The idea with investing is to buy good companies at a good price and hold them while they grow. These days, it’s much harder to buy these good companies that I’m actually interested in because this market is starting to look a lot more like IPOs where the initial trading premium is starting to get higher and higher.

Now, let’s talk about the inherent risks that come with SPAC investing and while they haven’t been such a good vehicle until recently. If it’s so easy to make money, why haven’t I been making this money every year!

The Risks of SPAC Investing

There’s a lot of negatives when it comes to SPAC trading and I feel like they require a LOT more legwork to understand than a typical investment.

The first and obvious negative is that you have NO IDEA what the SPAC you own will buy. There’s certainly a lot of analysis in you can do in reading the S-1, figuring out the players in the target industry, looking at past deals the management team has done and the management team itself but in the end it’s likely opening a trading card pack or a loot box. You pay some money and you don’t know what you’ll get until you open in(or in this case until a deal is officially announced).

There’s an electric bus company called Proterra that most thought will go public via the SPAC route. There were various names tossed around but in the end, it ended up being a completely random SPAC that not many owned. The stock doubled in a few days.

That can be exciting but it can also be risky and lead to a fear of missing out, feeling like you have to be in every SPAC to not miss these great returns.

In the end, who the hell knows what you’re going to get. That’s the interesting part of SPAC investing and why it’s such a difficult strategy to be successful at in the long run. At least in standard stock picking(where most active investors fail to beat the market), you know what you’re buying. Here you sorta hope it’s a good company based on management.

That can certainly lead to uncertainty around actual return and investment success.

Does it matter? Don’t all SPACs do well? Well even though 2020 was a banner year for SPAC performance, some still tank.

In 2020, of the 64 SPACs that closed a deal, 19 of them are trading below $10 today. This includes two companies that are 80% below their NAV since closing in March and July respectively. That’s a pretty terrible return for those who invested in those companies.

Of course, the reverse view of the upside is obvious as that means that 45 companies have a positive return including two companies that are above $50 and four others that are above $30.

In that sense, SPACs can be very attractive and appealing for a short term trade which often leads people to ignore fundamentals. That can lead to companies like Nikola which soared to $60 after announcement and now trades at $19 despite not having any revenue and various suspect dealings.

In fact, when you talk about financials and fundamentals in general when it comes to many SPACs, it’s an interesting discussion.

After all, many companies going public via SPAC this year have been immature R&D level plays in industries that have yet to really develop. Many valuations are very dependent on future projections as many of these companies have no revenue at all right now.

As an example, QuantumScape, the biggest SPAC success story of last year trades at a $19.6B valuation, 435% above its deal price despite having no projected revenue until 2024 where it expects to have $14 million(that’s right million) dollars in revenue. Of course, in 2027, they expect to explode in growth and have 6.4B in revenue so it’s fine.

Note that I did own QuantumScape as a short term trade but no longer hold it. While some of these companies are certainly in industries that may have a huge impact in the future with a TAM(total addressable market, a huge buzzword in business these days) of impressive scope, it’s all based on very speculative assumptions and growth projections.

You can see what kind of volatility that leads to in the stock history below and where you can get burned if you buy at a high level here. You can also see why this type of play can be so enticing. If you bought near the beginning at NAV, you still have a massive return in a short period of time. However, this is clearly a best case scenario as I’m sure many people bought closer to $100 trying to chase the gains.

The recent trend in SPACs has been to take companies public that are in a hot growth industry with a huge future TAM(EV, battery technology, fintech, gambling, drugs, etc.) and base valuations on future revenue growth that may or may not materialize. Often, these plays are valued based on their 2024 or 2025 revenue and that’s certainly a risky prospect for investors who may have to wait quite a bit of time to see if those revenues materialize.

The fact that these companies often jump quite a bit after announcing the merger makes it an even riskier proposition for those buying into the market hype and buying after that bump trying to chase a big name after missing it before announcement. Yes, some of these companies will potentially emerge as good players in a fast growing market making today’s valuations a bargain but many likely won’t.

That’s been the case with SPACs historically as most have driven negative returns post-merger when you look at it from a long term perspective. There are various time periods in various studies but I’ve yet to find one where the long term returns have been positive on average.

In the linked study above, the authors found that between January 2019 and June 2020, the mean SPAC returns 12 months post merger were 21.5% WORSE than the Russell 2000 in the same period(-34.9% return total). Note that this did include the March 2020 market flop but clearly these numbers are not good.

Note that the authors did break out a cohort of SPACs they deemed as high quality(those with management teams with former CEOs of fortune 500 companies and/or by teams with a high level of assets under management) and those did significantly better.

That does seem to show that there is a quality element to SPACs that drives better returns than the average but once again, stock picking is a hard game in the long run.

That brings us to another negative of SPACs and why they often do poorly in the long run post-merger.

Their structure can suck. Quite often, these SPACs are designed to be rather unfriendly to investors due to the dilutive effect of their structure. SPAC ownership takes a portion of equity as a payment for making the deal and to entice initial investment in the SPAC, warrants and sometimes rights are issued to unit holders that allow them to take a further stake in the future company at a certain price. PIPE investments and outside investments after redemptions can also further dilute individual holdings in the newly created company.

As such, the dilutive nature of the SPAC can sometimes lead to the individual investor losing 10-20% of expected equity due to these elements which can certainly put pressure on the overall stock price.

In simpler terms, in order for a deal to be worthwhile to an investor, it has to be good enough to offset the dilution you may see.

It has to somehow create value which can be difficult to do given that a SPAC doesn’t bring any benefits to the new company beyond a cash infusion.

This “value” creation may seem like it’s happening when the price of the SPAC you own takes off post merger announcement but that can be misleading and simply can’t last forever. After all, eventually these companies will start trading on their fundamentals and that can be a problem in the long term when the initial price appreciation is often driven by hype.

It may still work out if you bought near NAV but buying well above after the hype train has left the station may be a risky proposition.

The fear with SPACs as with all profitable ventures is that early success leads to more entrants which leaves the individual investor in a less favorable position and drives prices higher than they should be due to speculative bubbles forming. If A goes up to $20 and B goes up to $20 then C should be at $20 and so on and so forth.

Now that SPACs are more mainstream, there has already been a lot of price pumping on various message boards and via tweets that further separate the true value of a company from the stock price and since a lot of these SPACs have relatively low float, any small piece of news or hype can send it flying up or down.

After all, most deals are made on the principle that $10 is the fair value of the company as agreed to by the SPAC investors and the company itself. Any price appreciation above that before any earnings are released is technically speculative in nature.

Of course, the same can be said of IPOs(Snowflake is like 200%+ above IPO price) and somehow PETCO shot up 64% in it’s market debut and most IPOs on average trade up above it’s IPO price early in their life span.

However, as with all things, in the long term, the market will eventually price these things accurately.

Still with the recent returns in the space, there’s certainly an incentive for bigger players(hedge funds and the like) to get involved and purchase units at NAV when available driving up demand and prices in aggregate. The top 10 hedge funds now own more than 25% of all SPAC securities. The benefit to them is obvious. They can often get in at the ground floor buying units at $10 before they even start trading publicly limiting their downside to 0 and only keeping the upside. Now we’re back in a similar spot as IPOs where investors can no longer get anything close to IPO price while the big players can.

They can either hold till a deal is announced or even sell right away at times for SPACs that launch 20%+ above NAV on day 1 of trading.

They know the idea that made me like SPACs in the first place.

It’s essentially a low risk fixed income type investment when buying near NAV and that can be attractive when fixed income investments yields are near 0.

That was possible at times last year but now it’s less viable.

The individual investor is left buying something at a 20% premium while the big players profit.

Sure, some of these SPACs may still jump quite a bit even at a 20% premium above NAV if the deal is received warmly but how long will that last?

With so many SPACs out there and more launching every day, the competition only gets tougher. There’s only so many great companies out there willing to take the SPAC route and the prices for each one of them will go to the highest bidder which means investors will keep getting worse and worse deals with time.

That’s clearly not great news for investors especially as prices for SPACs continue to trend up.

A deal that valued a company at $3B last year might value it at $4B this year because there’s more SPAC competition and that’s a negative for any long term returns you might expect. Sure, the short term trade might still work out but that will only last until the trend breaks and people start seeing negative short term returns from some of these highly priced SPACs.

Beyond that, the hedge fund involvement, a SPAC is also seen as an easy way for private parties or even company ownership to get a big pay day. Depending on how individual deals are structured, the cash may often not serve to help the company much but to enrich company owners or private equity investors who then dump their shares post merger and create a highly negative return for the people who are left holding the stock itself.

That’s why so many SPACs often drop post merger(after a run up due to announcement). Hedge funds, owners and even sometimes SPAC management have no intention of being long term holders in a lot of these companies and want to take their profit and run often leaving the individual investor holding the bag.

Overall, SPACs are definitely a good deal for those who run the SPAC and since they are incentivized to make a deal to get their equity and payments, their decisions may not be aligned with the shareholders best interest. There’s a reason why many SPAC teams are already on their 5th or 6th SPAC in a year or two and it’s because they’re good business.

That doesn’t mean they can’t do well for themselves and their shareholders but investors need to be vary and vigilant of how a SPAC is structured and what the deal entails. Sometimes, you’ll see $500M in cash being invested in a SPAC and only a small % of that ends up on the balance sheet of the company. That’s not a good long term sign for investors.

The problem is that SPACs can often obfuscate this data make it difficult for a seasoned investor to analyze. Hell, it’s hard to tell exactly what you’re buying half the time.

After all, not only are the terms quite confusing but the data requirements are also much lower than an IPO which means a company can be a lot less open about their financial statements and the merit of any valuation.

Plus since these are often speculative investments, the thesis may not play out for years so any pricing movements may be driven by market sentiment more than anything and can lead to a ton of volatility(which can be both a positive or a negative depending on whether the price action is up or down). I mean one of the reasons I did do so well last year is because of how volatile these things are any given week.

Another problem individual investors face is that buying a SPAC means you’re locking up your money for an unknown period of time. If you’re buying in NAV with money that might otherwise be sitting in a bank account, that might not be a huge issue. However, if you’re buying above NAV(or even near NAV) with money that would otherwise be placed in an S&P 500 index fund or other stock holdings, there’s an opportunity cost to your investment.

You could put $1000 into a SPAC that won’t announce for 16 months and miss out on overall gains in the market. Even if the announcement is pretty good and the stock goes up a bit, the alternative might have been getting more gains in something else.

My SPAC Strategy into 2021

I still like SPACs today but as you can see, the risks of investing in SPACs are pretty high.

The good ol’ days(of 6 months ago) of buying most SPACs near NAV are behind us and while they may return, they make for a much tougher investing environment in the next 12 months.

I still don’t believe SPACs are anything one should be investing a ton of money in because the risks inherent in the investment are high and the underlying unknowns and dilutive structure can lead to poor long term returns for investors.

Even when buying at $10, SPACs have historically not been a solid investment in the long run. They have made for a decent short term trade but as any short term trader knows, there’s risks inherent in an active trading strategy where only a small percentage of investors end up beating the market.

That risk is certainly smaller when buying at NAV than when buying well above but it still exists.

Overall, the ease of entry into the SPAC market has meant that a lot of poor quality management teams have historically seen it as a way to get paid quick and jump ship and that has driven some of this poor performance.

I do believe that this is changing and while there are still plenty of suspect SPACs out there, more and more are coming to the table with excellent management teams and much more favorable and less dilutive terms for investors. Bill Ackman’s PSTH is an example of this but that ticker and ones like it often have a much greater premium to NAV at this point as well.

Now with the bigger players driving an unattractive entry point for a majority of SPACs, the prices and risks have gone up considerably across the board.

Whereas in 2020, I could get in at a 2% premium to NAV and sometimes even below NAV on bad market days, these days I would have to pay 10-30% above NAV for similar holdings that are still in the searching phase of the cycle.

Before my downside was maybe 2-3% with decent upside. Now, my downside can be 20-30% which makes that upside a lot less appealing.

Therefore, I think I’m going to sit out this next phase of the SPAC boom more so than I did in 2020.

My strategy this year is going to be the same as it was last year even if it won’t be as easy to do as it was in 2020.

That means buy close to NAV focusing on companies with investor friendly terms using money I can afford to lose. I know these are speculative investments so these have to be a small percentage of my portfolio. Given my returns last year, I’m essentially playing with found money know since I’ve taken out a lot of profits out of this venture already.

Given the prices today, it also means I likely won’t be buying much in this realm of the investing world until we have some sort of correction. Once prices drop back to a few % above NAV, I’ll be interested again but until then, I’ll wait it out. I still plan to hold a variety of my SPAC positions that I bought near that level and which have appreciated since then but that’ll be it for now.

The important thing with any trading strategy is to not fall into the trap that many investors fall into, the fear of missing out(FOMO).

There’s so many SPACs and only a few you can invest in so you’ll definitely miss out on a few winners. It’s very easy to gamble on stocks and even easier to gamble on something like SPACs which have another component to it, the excitement of a good unknown deal and being right. I do think trading SPACs has a fun element to it as weird as that sounds. Getting something right after being in from $10 and getting a good company that doubles is awesome. However, that’s also a dangerous element that lends itself to future loses. It’s obvious that people these days are getting more and more addicted to trading given the prevalence of free trades and SPACs are a big part of that. It sucks when you miss out and it’s great when you succeed.

Yes, there are SPACs that will soar to the sky after announcement and you’ll kick yourself for not investing. ACTC, acquirer of Proterra, recently double in a matter of days and is a company I really wanted to target with some of my investments. There were many rumors of who would acquire them but in the end, it went to a SPAC no one really considered.

That’s the reality of SPACs and one you must accept as a SPAC investor.

It’s also the reality in investing and one has to position that upside against the potential downside if the deal is not only for a bad company but also highly dilutive and poorly structured to the investor.

For now, the thing that will drive continued SPAC appreciation is the one thing that often drives stock market crazes, greed. With these types of immediate bumps, it’s easy to invest in a few SPACs, luckily make out like a bandit and think you can’t miss.

It’s basically what happened to me. Sure I did research, but in the end, my returns were driven mostly by luck and crazy market sentiment that sent some of these companies soaring. Getting 2-3x returns in a matter of weeks is not normal and will not continue forever.

However, returns like that CAN be addictive just like opening a pack of trading cards as a kid and finding that valued rookie card you always wanted and knowing that the other special card is out there somewhere. It makes you want to buy more and start to think that you simply can’t fail with this strategy.

I know people are still buying these pre-target companies at $12 but it’s not for me.

Perhaps, in the short term, that can work out, but in the long term buying this far above NAV will be a loser on average. Sure, some of these $12 stocks holding $10 in cash will turn into a winner but out of 270+ SPACs looking for companies, how many great ones can there be?

Yes, there’s still a good amount of SPACs closer to NAV(as of today around 80 of the 270+ spacs trade at that level, most in the 2-5% premium range) so values still exist and I’ve picked up a few of these more recently but the more diluted the market becomes, the harder it will be to pick the good ones and since the target is always unknown, it’s all a crapshoot most of the time.

There’s going to be a lot more misses than winners out there and you don’t want to be left holding the bag. After all, while certainly not true for all, many of these SPACs are there to make money for the managers involved in them. If they can do the same for investors then that’s great but it not, oh well, they made their money and they can move on.

One also has to remember that the companies being targeted are also being priced up by hype more than anything. They are sexy, interesting industries that COULD be the next big thing. They certainly may be but how many winners in the EV space can there really be, how many great battery makers can there really be in the long term?

If many of them are valued at $3B+ right now, will that be a good price point for all of them five years from now? Will QuantumScape be able to hit $9B in revenue by 2027 or will someone else develop something better than them by then?

Post acquisition, these companies can have significant upside but I would bet most of them will have significant downside at the end of the day. The question will always be whether or not you can actively pick the right ones or fail like most investors.

Even in the short term, if the pick doesn’t work out or the deal sucks or anything changes, you can bet your ass that the smarter hedge funds will dump right away leaving you with a poor company and a guaranteed loss if your purchase price was well above NAV or if you got too greedy and bought after the initial jump.

Overall, SPACs aren’t a bad thing but the recent appreciation in their prices has certainly made them a lot less interesting than they were in the past.

They’re still a great entry vehicle for industries that might be otherwise impossible to invest in at this point. However, one has to remember that they’re not able to go public via other means for a reason. Many of these companies that have gone public via SPAC are speculative at best and many will likely never come close to their projections.

Is it a bubble at this point? Maybe, certainly in certain areas but you can say a similar thing when you look at regular stocks that trade at 100X+ sales.

The expectations of this market are massive and that transfers through to any vehicle including SPACs which are certainly performing much better than they have historically. Will that lost for hte long term? I doubt it but some of these companies will certainly be winners in the long run and I’ll hold them for a while to see if my thesis plays out. Again, this is a small portion of my overall investment funds and money I can afford to take risks with.

However, for the most part, I play these for what they are. Hedge funds use them as short term trade vehicles because they can get them near NAV and get out with a decent return due to how these are structured to benefit early investors. If you’re buying at $12 or $13 before anything is found, you’re not an early investor.

It’s important to be aware of that as a SPAC investor and important not get attached to an investment or company that is basically worth $10 until they find something. In the long run, the SPAC owners and hedge funds and big players who can get in at NAV will likely win. The individual investor? Probably not unless they tread lightly.

Still, if anyone is interested, I have some $10 bills for sale! They’re $12.99 and I have a lot of them. I plan to buy something great with it, trust me.

Disclosure : I am not a licensed financial advisor and this is not financial advice. You should discuss any investments with your own licensed financial advisors. Stocks always carry risk of loss including full loss of your capital. I am long or have been long all tickers mentioned in this post as well as a variety of other SPACs.