Another SPAC Arbitrage Trade… at a Discount

Let’s be honest, the best market analyst of 2020 has been Dave “Davey Day Trader” Portnoy of Barstool Sports. 

He has insisted that “stocks only go up” and has continuously made bets on garbage stocks that move higher, largely thanks to his massive following and growing popularity.

He even gave one of the most recognized finance personalities on TV, Jim Cramer, a run for his money…

davey day trader popularity

He should have lost millions with the dumb bets he made on stocks this year.

He didn’t.

He made money buying random stocks without knowing much about the underlying business behind it.

Then, emerged a Robinhood crew that used the brokerage to become today’s trading legends in their own mind. 

One person making a stupid bet on a bankrupt company cannot accomplish anything. A few hundred thousand people doing it can temporarily turn trash into gold.

At the end of these trades, someone always gets caught holding the burning match or singing their financial fingers, but as long as it’s not me, I live to trade another day.

How to Trade Like the Best (or Worst) of Them

It only fits that a year like 2020 saw the return and rise of the SPAC.

Special Purpose Acquisition Companies (SPACS or, blank check companies) have raised more money in 2020 than in all other years combined.

The public has poured into them, and the internet chat boards are so full of discussions about the wonderful deal makers and how good the acquisition they have made will perform.

They keep up this stupid chatter even as the stock prices fall after their initial pop (as most SPACs do).

You see, most SPAC deals end up diluting the shareholders in favor of the sponsors. Plus, this year, we have seen private equity get involved. And you have to know that if the PE guys are on the opposite side of the table, it’s not going to end well for you.

As I’ve said before, as an investor, you can make good money trading SPACs once you realize that trading SPACs is not growth investing, and it is not some magic Pre-IPO.

Done correctly, making money in SPACs is simply arbitrage.

You should only buy them for the value of the trust or less. If the SPAC moves higher when a deal is announced, you should sell your shares immediately and take whatever gain you can get.

If it drops, you redeem your shares and get your money back (and maybe even a small profit if you bought at a discount to the trust value.)

With a handful of deals that have a nice initial pop and a bunch where we get a few percentage points, SPAC investing can provide you with consistent low double-digit returns that are as close to risk-free as you can get.

But it will not make you super rich overnight.

E.Merge Technology Acquisition Corp. (ETAC)

E.Merge Technology Acquisition Corp. (ETAC) is a SPAC that has a good chance of getting a decent initial pop when a deal (their acquisition target) is announced…

The company is looking to do a deal with a software or internet company, and that could get the Robinhood crowd in a temporary tizzy. 

The management team is led by Guy Gecht, the former chief executive of EFI, and Jeff Clarke, the former Kodak CEO. Steve Singh, who was previously CEO of the travel booking tech firm, Concur Technologies, is the Chairman. They have a thick rolodex and years of experience. If a deal gets done, it will likely excite the market.

You also have an interesting shareholder list on the same side of the trade with you.

Michael Dell’s investment firm is a huge shareholder of ETAC…

Philip Goldstein’s Bulldog Investors, who we have covered before, was a buyer…

And hedge fund giant Apollo is in the deal, as is Mario Gabelli’s firm.

You can buy the shares at a discount to the trust value right now. So worst case, you end up making 3% by tendering your shares back if the deal does not attract buying pressure.

It is highly unlikely that these types of trades will change your life. But they can earn you a low-risk profit. You just have to learn the rules and follow them.