I’ve written extensively about SPACs (Special Purpose Acquisition Companies) and SPAC warrants. One of the most important aspects of a SPAC is that if the SPAC doesn’t “do a deal” investors receive their investment back.
So if you own common stock shares of a SPAC you basically are taking on no risk.
If you look SPAC trading behaviour last quarter, when the market was melting down, you’ll find they might drop intraday as market investors panicked and tried to free up cash, but they would bounce back the next day or two, if not the same day, and finish basically unchanged. That’s because they are basically a piggy bank.
It’s kinda like loaning your best friend $10 because they forgot their wallet and they need to buy lunch. If they come back to you later in the day and say they worked right through lunch and didn’t have time to buy it, you’d expect them to then say, “So here’s your $10 back.”
Same thing with a SPAC. If they don’t buy lunch = do a deal, then here’s your $10 back.
SPAC Warrants
But what about the SPAC warrants. As you know if you’ve read my posts on SPAC warrants, it’s not the same for the warrants and the common stock. In the case of the warrants, your friend would say they didn’t get to buy lunch and “Oh no, I seem to have a hole in my pocket and lost your $10.”
No deal by the SPAC means the warrants go to zero.
As far as a pattern in the warrants, this means the warrants ALWAYS drop in value as the SPAC gets closer to the deadline for either doing a deal or giving investors their money back. (And NO, it’s a great thought, and I really do appreciate the thinking process, its one of the first questions I myself asked when I realized this, but you CANNOT short the warrants.)
But, depending on the SPAC, this decline in value may not happen until 6 months from the deadline, or even closer.
So, why, when the market declines, do SPACs with well more than 6 months until their acquisition deadline, retain their price, but the warrants drop in value?
SPAC Deal Environment…or OH MY GOD THE MARKETS CRASHING, I WANT MY MONEY BACK
The SPAC warrants go down for three reasons:
- A market crash that makes investors just want their money back
- A recession that makes capital hard to obtain
- A perception that the deal cannot happen due to uncertainty in the market
Crash
If you were trading during the dotcom crash or the financial crisis of 2007-8, like me, I don’t need to say much more. In a market crash no deals are done, and everyone just wants their money back. If you DIDN’T trade through those times, you’re thinking “hey, a SPAC could pick up a GREAT deal when that happens”.
Logically, 100% correct, just like the buy and hold school, market always goes up eventually so why worry about it, just buy and hold. Reality, market goes down, and the buy and hold investors are in there selling with everyone else, usually close to the bottom…I digress.
Bottom line, if there’s a market crash you look at you’re one stock down 40%, your other one down 50% and you see your SPAC common sitting there flat. No way you vote for the SPAC to basically put money in the market. Its give me my money back. (The hedge funds invested in the SPAC are already getting margin calls, so they’ll be voting against any acquisition as well.)
Recession
A recession isn’t as bad for investors, since instead of shear panic you get a longer, drawn out correction that isn’t as deep as the crash. But still, it usually makes capital hard to come by and you get the same result for the SPAC.
Deals are rarely done because a SPAC acquisition is MORE of a risk than investing in an already established public company. Your advisor and the talking heads on CNBC are going to be telling you to invest in “quality stocks.” (whatever that means…OH, like GE…gotcha)
Hedge funds that are invested in the SPAC are usually underperforming a down market and investors are asking for their money back. So, again, they’ll be voting no for an acquisition.
Finally…
Uncertainty in the Market
For my money, this is where we are right now. The markets went through a brutal few months to end the year, but then ended off only a few percentage points for the year.
But there is enough volatility and uncertainty in the market for investors to begin questioning whether SPACs will be able to do deals if the sell off resumes, or if volatility remains high. And so, you have a decline in the price of SPAC warrants.
In addition to being investment vehicles, the warrants act as a polling mechanism. If you think a deal will be completed (or even announced) the warrants are a buy. If you think there’s no way a deal will be done, then you definitely don’t want to own the warrants.
As you can see from the prices of SPAC warrants, the market action in the last few months has made investors in SPAC warrants a little less optimistic that deals will be done in 2019.
But, if you believe, like I do, that the market may be in for a so-so year, maybe up a little or down a little, but no major recession or crash, this is a buying opportunity in SPAC warrants.
3 SPAC Warrants to Own on the Pullback
The first SPAC warrant I’d own here is Far Point Acquisition (FPAC, FPACWS). I’ve been watching this one and waiting for a pullback since it came public. I like the fact that the ex-head of the NYSE is involved in the SPAC.
I believe if they don’t do a deal I think it makes Mr. Farley look bad on his first “job” after being President at the NYSE Group. So I think they have a little extra incentive to get a deal done.
David Loeb’s Third Point is involved in the SPAC, and they just announced a loss of 11% for 2018. They’ll definitely get some redemptions but I don’t think it will be anywhere near something that would impact their investment in FPAC.
Second, I’d take a look at Thunder Bridge Acquisition Ltd. (TBRG, TBRGW). What can I say, I have a soft spot for fintech focused SPACs.
Having used trading technology as a market maker and trader, using regulatory systems both as a regulator and consultant to NYSE Regulation (all now FINRA), and having consulted Fintech startups, I KNOW this industry is ripe for disruption and there are a LOT of “targets of opportunity”.
Here my bet would be that they can at a minimum identify an acquisition target. Remember, for the warrants to move up it doesn’t matter if they do a “successful” acquisition, or even if they do an acquisition at all. We just need them to announce they are going to try to do an acquisition.
Third, check out VectolQ Acquisition Corp. (VTIQ, VTIQW). VectolQ is looking for an acquisition in the autonomous vehicle, smart mobility space.
Having recently done a consulting job for a client involved in this space I had a first-hand in-depth look at the industry and its another one that is ripe with targets. A lot of technology is converging in the smart car which makes it a very broad area in which to seek an acquisition.
And, acquisitions are happening at a pretty steady clip. VTIQ, like Thunder Bridge, should have little trouble identifying a candidate as an acquisition target. The warrants have already recovered some of their pullback, but I still like the warrants in the $.50 to $.60 range.
Best Arb of the Year so Far
For the past few months I’ve been trying to figure out how to best deliver value to you as a reader, and at the same time turn stockwarrantshq.com into a business, as opposed to a hobby, for me. I really do love sharing the knowledge I’ve gained over the years and learning from you guys. A LOT of you are very sophisticated traders / investors / arbitrageurs.
As part of that process I put together a warrant arbitrage course, which upon looking at the completed product, is a pretty high level master class in warrant arbitrage. But, I think I break it down into easy to understand chunks, if you’re willing to pause the videos and think about the concepts for a minute.
Another way I want to share information on warrants, SPACs, and the market in general, is through a paid newsletter subscription. I’ll detail (at least) 1-2 warrant opportunities in each issue, and also maintain a SPAC portfolio, or as I like to call it, SPACfolio.
So, here’s the best arb deal going. For a limited time (really, I’m constantly fiddling with the marketing because I’m a stock guy and not a marketer, though I am taking the same approach I took to learning to trade stocks and immersing myself in the whole marketing thing…another digression) you can get 3 months of The Warrant Observer, the new newsletter, for $97, which is $50 off the 3 month price. In arb terms that’s a 51% return…you’re buying something for $97 that’s worth $147, BOOM.
And, you get my book on warrants, as well as the arbitrage course, and a few other bonuses. So, even if you have no interest whatsoever in the arb course, and you’ve already read my book, you still come out ahead. (For some reason I always think of Herb from WKRP in Cincinnati when writing this stuff.)
Honestly, if you can’t make more money from the newsletter then what you pay for it, I’ll happily give you a full refund (but only after questioning your ability to ride a bike and chew gum at the same time…kidding).
And there endeth the pitch. I hope you enjoyed the post, and you can check out the offer for The Warrant Observer, Arb Course, and everything else here. I think you’ll really enjoy the newsletter next week, I’m pretty excited about it.
Please comment below with any questions, or if you pick up any of the SPAC warrants let me know at stevenadams@stockwarrantshqcom.