Is That a SPAC in the Water? A Week of SPACfolio Ideas
Hope you’re having a wonderful Labor Day weekend!
It’s an incredible day here in Maryland, and I’m working outside enjoying some very nice weather.
One of the ways we invest in warrants at the Warrant Observer is in something I call a SPACfolio.
I’m not going to bore you with the details on a holiday weekend, but the very basic point is to invest in warrants of special purpose acquisition companies that have not yet announced a deal. Often, when they do announce a deal (but not always) the warrant moves higher immediately.
As an example, check out the warrants of Kensington Capital Acquisition, KCACWS, which moved from $1.26 to almost $8 last week on an acquisition announcement.
The week before last, we had a little fun over at the Warrant Observer and did a five day long “Shark/SPACfolio Week” with a few suggestions each day of possible warrants to include in a SPACfolio.
I’m sharing that series with you this week, which may spark some ideas if a SPACfolio is something you want to consider in your warrant investing.
First “Shark/SPACfolio Week” email, originally sent August 24th to Warrant Observer members:
I want to do something fun as we head into the waning days of summer, and have a little shark week series…except we’re going to be doing SPACfolio week.
I have some reasoning behind why I want to do this right now, but first a quick trade update.
I sent an email out on July 26 about Forum Merger II, or Tattooed Chef, FMCI/W. I thought $3 was the bottom for this phase of the SPAC’s journey, and both went long, as well as did a covered call/warrant trade with August calls.
We’ve been adjusting that trade in the discord, but if you took it the out of the money short call options expired Friday. Or, if you did calls against common stock that was called away.
Depending on what you did with those the percentage return would vary, but it was a nice trade, and at a minimum you should have made something in the 12% range. And, if you traded it at all your return should have been much higher.
You could have rolled those calls against new common, which you can still do now. But, you should also be up substantially now in any long, uncovered position. As of today the warrant was up over 37% if you got the warrant around $4, and closer to 80% if you got it closer to $3.
I constantly talk about patterns. But remember, the pattern is there to do two things, give direction and provide timing.
If you’re happy with the profits you have, take them.
The pattern got us in between $3 and $4, and if you’re happy with 37-80% returns in a month, cash that check.
I do still like this one. And, I believe it moves higher into the merger…and likely after. But, I also take profits along the way.
I am long common and short September $20 and $22.5 calls against much of it.
SPACfolio Shark Week
So, why do I want to do our own little version of Shark Week with the SPACfolio?
I believe we’re going to see an uptick in SPAC deal announcements, even more than we’re seeing now, as we head into the final months of the year. Why not take advantage of it by broadening out our SPACfolio options.
Remember, the SPACfolio is there to catch that initial pop, not call the company trajectory for the next 5 years. These are plays we want to see announce a deal AND have room to move higher immediately.
The main criteria I’m looking at are industry focus, management background, AND very importantly, the price of the warrant. I think we can pick a SPAC focused on the hottest industry, with the absolute best management, and if the warrant is trading at $4 (assuming exercise price of $11.50) there won’t be much of a pop. So we’re looking for the best “cheap” ideas out there.
I’ll send out two ideas a day this week. And, if you have others, let me know.
These are not official additions to the SPACfolio at this point, but ideas you may want to look at further. (I don’t think I need to put in a reminder, but the official SPACfolio should be a guide to “how to” put together such a portfolio, and not the be all end all SPACfolio for you.)
We started talking about it a little in the discord today. But not my reasoning behind broadening out the SPACfolio.
With that, my first two sharks…huh, SPACs, are…
New Providence Acquisition Corp. (NPA/WW)
New Providence was formed to find a company in the consumer sector.
I want to look past CEO Alexander Coleman, and focus on Co-CEO, Gary Smith. Smith comes from Red Bull and recently ran Big Red, a drink company he diversified and sold to Keurig Dr. Pepper (KDP).
Fresh of our recent success in FMCI, it is very clear the pandemic is reordering the consumer food world. A savvy management team should be able to come across a sustainable, natural, or great consumer brand (e.g. Utz…CCHWS) and sell that story for a good pop in the warrant.
Forget the next Beyond Meat…they’ll be pitching as the next Tattooed Chef.
And, since we’re talking food, and it’s almost dinner time for me…how about some Italian…
Galileo Acquisition Corp. (GLEO/WS)
This one may be more of a long shot…but, all we need is a deal announcement, and this $0.40ish warrant should pop. I generally don’t like foreign issue warrants, if this becomes that, as they are harder to trade…but before the acquisition announcement, no problem. (I would not pay out of the $.40s for this one though, that’s part of it’s charm.)
Galileo is run by a team of managers with extensive private equity experience, in a variety of industries. Their focus is broad, but they are looking for an Italian company that exports a large percentage of its products to North America.
How about organically grown Italian wines? Management has a great deal of experience with both food and beverage.
I think we could easily see a move higher here on any number of announcements. We can’t travel anymore, so we’re willing to pay more to have Italy (and the rest of the world) come to us.
Until tomorrow, arrivederci!