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Calculated Risk: How to Invest in 2021

It has been a hell of a year for IPOs. 

Last week we saw DoorDash (DASH) fly, closing the day up 86% from its IPO price of $102.

Airbnb followed the next day with its own very impressive first-day move. Shares rose 113% above the IPO price of $68 to close at $144.71.

If you got into these companies with IPO shares, count your blessings, and take your profits. The valuation on both is insane. 

Airbnb may someday be worth the price, but DoorDash will never be worth $70 billion. I suspect that 2020 will turn out to be the peak of revenues for DoorDash as a vaccine allows the world to normalize by mid-year 2021.

While those were the headlines, don’t overlook the fact that Hydrofarm Holdings (HYFM) jumped 159% in its debut yesterday. And on Wednesday, software company C3.ai (AI) also saw shares more than double after its IPO closed.

According to Professor IPO Jay Ritter of the University of Florida, Airbnb was the 19th IPO to double on its first day this year.

Don’t forget SPACs…

So far this year, we have seen 220 blank check companies go public. There were ten on Friday alone.

In the year 2020, this can only lead to one thing… speculators. 

Each week I check in on the Reddit and Facebook SPAC groups to see what the chatter is. If there is one prediction I can make with 100% certainty for 2021, it’s the inevitable and epic amount of money that will be lost trading these things. No one has a clue what they are doing.

If you want to make money in SPACs, you must treat them as an arbitrage trade, not a growth opportunity.

SPACs are not Pre-IPO shares that will grow your wealth to the sky. Most SPACs that have completed a deal are below the IPO price. There are a few that will do well, but they are the exception, not the rule. 

I have written about how to trade SPACs before. You can read it here.

Is it 1999 all over again?

I have no idea. 

The vaccine news is bullish. It could lead to a recovery in the heaviest hit industries like airlines, office buildings, hotels, restaurants, and retail. That would be great news for stocks in these sectors.

Unfortunately, it will take at least six months for the vaccine to have a positive impact and allow us to get closer to normal. 

In the meantime, the coronavirus is running amuck with cases, hospitalizations, and deaths all on the rise. This could lead to more shutdowns that take the economy and potentially the stock market backward.

It doesn’t help that Congress is doing its usual superb job of passing meaningful bipartisan legislation that helps all the people thrown out of work by the pandemic.

If they do not get cash in the hands of those that need it, it’s horrible for the US economy. Unpaid rents lead to unpaid mortgages.

Unpaid mortgages lead to loan defaults or deferrals. That’s horrible for banks and other lenders.

There are 18 million people collecting unemployment benefits of one type or another right now. If we do not pass an extension of benefits, then a lot of these folks will start missing car and credit card payments. They will have to stop spending money on anything but the very basic needs of life.

That slams the brakes on the economy and could lead to severe credit conditions in the banking and lending industries.

Around here, we call that a financial crisis.

Bill McBride of Calculated Risk reports that according to data and analytics firm Black Knight we are already seeing signs of all of these things happening. 

Black Knight finds that “Despite the marginal weekly improvement, forbearance volumes are now up 21,000 month-over-month, marking the first monthly increase since the onset of the recovery in late May/early June.”

By the way if you really want to stay up to date on the current economic situation with just facts and numbers rather than pipe dreams, you really should be reading his blog at www.calculatedriskblog.com.

In the world of financial publishing, sending readers to someone else’s website is the equivalent of a Macys (M) salesperson telling you to shop at Gimbels, but the guy cuts through all the crap that’s out there.

Closed-End Fund Activism

Keith Gottfried, a Partner at the law firm of Morgan Lewis, recently wrote about the increase in closed end fund activism in 2020. He found that “Shareholder activism at closed-end funds was up noticeably in 2020, with closed-end funds experiencing more activist campaigns and proxy contests than in any other year between 2008 and 2020.”

He added, “The COVID-19-driven market dislocations that occurred in March 2020 resulted in a significant, though relatively short-lived, widening of the discounts between a closed-end fund’s share trading price and its per-share NAV. This widening of the average NAV discount for US closed-end funds, which came close to the previous all-time record high set in the wake of the 2008 financial crisis, created an attractive opportunity for activist investors to accumulate large positions in the closed-end funds most impacted by the market dislocations and, thereby, lay the groundwork for activism campaigns to pressure closed-end funds to pursue liquidity events like self-tender offers that would allow activist investors to monetize such NAV discounts.”

Mr. Gottfried thinks the success CEF activists have had in 2020 may attract attention from some activists who ordinarily pay little attention to this marketplace.

This all makes me want to buy CEF activist targets and potential targets.

Fixed income funds are especially interesting since we know rates are not going higher anywhere in the world anytime soon.

Saba Capital filed another 13D on Templeton Global Income Fund (GIM) this week. Saba is now up to 10.03% ownership of the fund. 

40% of this fund is invested in US Government bonds or cash. The yield is only 3.2% but Saba isn’t going out much to narrow the discount further giving up a double-digit total return possibility with a relatively low-risk profile.

Saba has scored wins against some big-name fund companies, including Neuberger Berman, Blackrock, and Nuveen. There is no reason to think they can’t force Franklin Templeton’s hand with this fund.

A tender at par would give us a total return of over 15%.

That’s not too shabby for a portfolio of mostly shorter-term global government bonds and cash.

We remain moderately cautious to awfully damn risk-averse right now. If we can find investments, we love at prices we like, we will be buyers.

We are looking for ways to make equity-like returns from lower risk arbitrage situations and closed-end funds in these oh so interesting times. As we find them, we will bring them to you.

– Tim