Some Bargain Opportunities in an Overvalued Market

The recent selloff in the SPAC market has created some bargain opportunities.

After weeks of waiting on the sidelines, perhaps it’s a good time to put our SPAC strategy to work. Here’s what I’m keeping an eye on:

Shares of the new KKR deal, KKR Acquisition Holdings I Corp (KAHCU) started trading last week, and the units are still sitting right around $10. I am pretty excited to see what KKR, Lululemon CEO, and retail Private Equity investor, Glenn Murphy, can do with this SPAC. The units include 25% of a warrant, so if we were to back out the warrant value, then these shares trade for less than the value of the trust.

If you can buy units under $10.10, I would do so. We will revisit this one when the warrants and commons shares are separated.

EJF Acquisition Corp. (EJFAU) units are trading below $10 right now. EJFAU is a vehicle that EJF Capital intends to use to buy a financial services company. Guys, this is Emanuel Friedman and the old team from Friedman Billings and Ramsey (FBR). If you don’t know anything about FBR, don’t worry – I know them well. I even interviewed for a job with them back in the day on trading distressed debt and small bank stocks. They are brilliant financial services investors, and I have a lot of faith in their ability to make a deal that gets a pop.

If I am wrong, as always, I get my money back and whatever I sell the warrants for along with the discount form trust value is my return.

Lastly, Sam Zell’s Equity Distribution (EQD) is quietly trading right around $10 for the common shares.

When it’s all said and done, today you can invest your money alongside KKR, EJF Capital, and Sam Zell with virtually no downside risk. I consider that an incredible opportunity.

Use down days to buy up these SPACs.

Insights From The Great Phillip Goldstein

After reading over the annual shareholder letter from Bulldog Investors’ Special Opportunities Fund (SPE), I stumbled upon what strikes me as a must-own idea.

In the letter, co-founder and partner of Bulldog Investors, Phillip Goldstein, writes about one of their holdings, The Dividend and Income Fund (DNI).

Goldstein writes:: 

“…The fund owns shares in the Dividend and Income Fund (DNI) which is controlled by the notoriously shareholder-unfriendly Tom Winmill. Tom is a man who takes a narrow view of the concept of fiduciary duty. To entrench his advisory firm, he loaded DNI with a host of formidable anti-takeover provisions, including a share ownership limitation of 4.99%.

His latest ploy was to delist DNI last October so that it would no longer be required to hold annual meetings at which shareholders could vote on proposals or directors. That move caused the discount of DNI’s shares to explode to its current 33%, a discount that can only be called obscene. There is talk of a potential lawsuit from shareholders that have suffered from the delisting. We look forward to further developments.”

DNI (OTC:DNIF; NASDAQ:XDNIX) is trading at a discount to Net Asset value right now of 31%. 

That’s criminal.

But it is also an opportunity.

These are the top 10 holdings of the fund:

  • AutoZone, Inc. (4%)
  • Skyworks Solutions, Inc. (3%)
  • Medifast, Inc. (3%)
  • T. Rowe Price Group, Inc. (3%)
  • Tractor Supply Company (3%)
  • Credit Acceptance Corporation (3%)
  • Intel Corporation (3%)
  • Comcast Corporation (3%)
  • Citizens Financial Group, Inc. (3%)
  • Williams-Sonoma, Inc. (2%)

These are good companies, and we can buy them for 30% less than the current price quoted on the stock exchange. Furthermore, the fund is yielding over 7.5% at current prices.

Somebody is eventually going to take action to narrow that discount. 31% has to be considered shareholder abuse at some point.

Regardless, we can buy a little at current levels today with the idea of buying more in the event of a market pullback.

Proceed With Caution

Speaking of market pullbacks, keep in mind, that I am still not in love with current market conditions. Valuations are too high, and the low-interest rate case for supporting these valuations is a pile of something unlovely, in my opinion.

We have never had a high-returning decade that started out with high valuations. Every low-return decade has started with high valuations.

When rates go up – which is already starting to happen – we could see the bull case for stocks threatened.

Continued agitation on China’s part in the Asian Pacific region could also be bad news for stocks as well.

I don’t think they will do anything significant in the region until after the 2022 Winter Olympics and Xi Jinping’s reelection as general secretary of the Community Party that same year. However, any step in Hong Kong or Taiwan could rattle the global markets pretty badly.

Lest we forget, COVID is still with us, and as a planet, we are doing a lousy job of getting vaccinations in arms. The US is better than most, but that’s kind of like saying the Baltimore Orioles are better than most little league teams. It doesn’t mean we are doing a great job by any stretch. Adverse COVID developments would also be horrible news for the stock market.

Having said all of that, markets are unpredictable. Proceed with caution. Keep your position sizes small and think outside the box.