Want To Invest In SPACs? Stick To the Rules

What I am seeing happen in the SPAC space right now borders on lunacy. 

The level of misinformation and willful idiocy borders on criminal. In fact, if someone holding a securities license uttered some of the pure crap I see on the various bulletin boards and chat rooms I troll on occasion, they might go to jail.

Let me cover once again the number one rule of investing in SPACs: Do not overpay.

Paying a hefty premium over the value of the trust is foolish. 

What’s a hefty premium? Anything more than $.05-.$.10.

Here at Thunderclap Research, we stick to the rules

You may recall we got you into Churchill Capital (CCIV) at $9.80 if you were paying attention. 

If you still own shares of CCIV, you should sell them. Four-baggers in four months are rare in the real world and even less so in the land of hopes and dreams that has become some corners of the SPAC market in 2021.

Hell, I was only willing to pay a $.06 premium to get involved with Sam Zell’s SPAC late last year. And he is Sam F**king Zell.

We only paid a dime premium to get involved with Betsy Cohen’s fintech SPAC. As the founder of the Bancorp (TBBK), Ms. Cohen is a fintech pioneer. Since my suggestion, the SPAC is up 30% after making a deal with a payments company. If you do not have a stop order between $12 and $12.50 on share, do that now or just book the gain.

Most closed SPAC deals have been terrible

Researchers from Stanford and NYU looked at the post-merger performance of SPAC deals and found that, on average, they tend to lose about a third of their pre-close market value.

I suspect that’s going to get much worse given the low-quality speculative nature of some of the proposed deals I am seeing made today by SPACs. The SPACs right now simply have lots of cash and no ideas.

The idea that a CEO’s ability to sell electric vehicles means they will somehow compete with Tesla (TSLA), BMW, Ford (F), Fiat Chrysler (FCAU), and Google (GOOGL) is laughable.

I see SPACS go to premiums because of proposals to buy companies without revenues and just an outline of a deal.

I am seeing deals where add-on Private Investment in Public Equity (PIPE) offerings allow private equities and hedge funds to end up with the bulk of the equity, with SPAC shareholders in a minority position.

Again, if your deal pops when announced, either sell or use a tight trailing stop. I think many of the deals could be headed for the oblivion of the garbage can post-merger, and you do not want to go along for that ride.

SPACs To Have On Your Watchlist

Right now, I don’t see much to buy with new money in the SPAC aftermarket. 

I do have a close eye on Oyster Enterprises Acquisition Corp. (OSTRU) to see how the shares trade once the warrants can be separated. I am a huge fan of Randall Smith, and this is his SPAC.

I have been following Smith since I was regularly pirating research from his distressed debt brokerage firm in NYC back in the late 1980s and early 1990s. He made a lot of money for his clients, himself, and unknowingly a small handful of idea pirates in the San Joaquin Valley of California, by buying bonds of bankrupt companies for pennies on the dollar and cashing them at multiples of the purchase price.

Oyster CEO, Heath Freeman, has worked for Mr. Smith since 2004. While he is hated in the newspaper business, Freeman has made millions by squeezing every last penny of cash flow out of a dying industry.

If I can buy shares under $10, I will be interested. If I can buy units at a value that allows me to sell the warrants and get my basis under $10, I will be interested.

If Smith and Freeman make a smart deal and the market likes it, we will see a nice pop. 

If they don’t, I get my money back, maybe even with a little interest, if I can buy in at a decent discount to the trust value.

Upcoming SPACs

Looking at the SPAC IPO calendar, I only see two that I may want to be a buyer of.

The first is KKR Acquisition Holdings, which has just been filed at the SEC. The combination of KKR (KKR) and Lululemon (LULU) chairman Glenn Murphy could hit a home run in the consumer space.

If they don’t, I will redeem by units for a small gain after factoring in whatever I get for selling the warrants.

The second is Simon Property Group Acquisition Holdings, which also filed an S1 only a few weeks ago.

Nobody knows more about disruptive retail than David Simon and his team at Simon Property Group (SPG). As one of the largest mall owners in the world, they have seen both sides of retail disruption. I am pretty confident they will find an attractive deal in real estate or retail that the market likes.

If not, I will take my break even or small gain and move on to the next one.

In the coming months, we may just see a market correction that allows us to snap up SPACs at a decent discount. If and when that correction comes, stay tuned because it could be one of the easiest, risk free ways to make money in 2021.