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For those investing in public equities: I personally believe some SPACs are definitely worth it in the long run. SPACs suffering on the public markets are a gre

by cl42 5y ago

For those investing in public equities: I personally believe some SPACs are definitely worth it in the long run. SPACs suffering on the public markets are a great opportunity to make long-term investments if you are very, very careful and wait a bit longer than most to jump into the right companies. From my experience, the strategic part is to wait until warrants expire. Most SPACs have very, very positive investor presentations that assume they will 10x or 100x in value over the next 5-10 years... Typically, SPAC sponsors get warrants to buy additional shares of the companies at a significantly lower price than those buying on public markets post merger... Knowing nothing else, you'll want to wait until these warrants expire as that's when things should stabilize. ... at least that's my strategy. Curious what others are doing.

chews 5y ago
Your warrant coverage thoughts are very on point, spacs if structured properly are very clever but the lack of transparency on warrants and notes is a problem for the asset class.
- cl42 5y ago
  ...and what's also interesting is how little innovation there is in SPACs. Tells you a lot about how stale/uninnovative the entire finance industry is. Everyone has similar warrants, similar share structures, and even the $10-pre-merger price. AFAIK, there's no reason for all these consistencies beyond copying and pasting the original docs. Anyway, I am tracking a lot of SPACs and waiting about 1-2 years before diving into some of the more promising ones. We'll see how it goes!
Fordec 5y ago
There were a few companies that I was waiting for to go public that ended up going the SPAC route around the time I didn't have extra capital to deploy at the time they went public. Now, I'm just glad I didn't. While I still intend to invest once the knife that is their valuations stops falling and starts to rebound on fundamentals, for now they still have a bit more to lose in their valuation to be in line with the rest of the market on your standard metrics eg. P/E. I'm just not gutsy enough to short the stocks until then. One thing I am now on the look out for is for short-term short squeezes before initial lockup periods expire.
neilarmstonk 5y ago
Perhaps overly cynical but my take is that there’s little relationship between fundamentals and valuations of “exciting” public companies at the moment, and so acting on any grand theory about underlying value is acting in the face of an unfortunate reality: you could be right… and still lose money. You can find example after example of company that is either vastly overvalued, or vastly undervalued, according to any reasonable measure. I have no confidence that I can effectively predict the stock price of one of these companies, and SPACs fit squarely into that category. If I was looking for high-risk high-reward, I’d rather take riskier bets on known quantities.
- trophycase 5y ago
  Is that why the most profitable companies are also the most valuable?
  - pjc50 5y ago
    But the reverse does not hold true: plenty of the highest priced companies don't make a "profit", in the accounting sense. Such as Amazon.
    - ac29 5y ago
      That hasnt been true for years. Amazon has had a positive net income for quite a while. Their margin is small, but not negative.
BbzzbB 5y ago
I'm a small-time retail amateur and consider myself conservative with my portfolio (I stock-pick so that may be generous) so take this with a spoonful of salt. But to me, by buying in SPACs, or IPOs for that matter, one is trying to play VC's game. You're buying companies who have yet to prove their business model, who are likely far off from actual profitability - earnings before everything else (EBITDA) doesn't count - and whose valuations have a ton of future growth front-loaded. That may work if you have deep knowledge of a market, it's participants and how $X company fits in, but I suspect most people buying these young stocks don't have any particular knowledge of them. However with that in mind, the main issue to me is that one would be playing that game after actual VCs had the opportunities to play during private rounds. When cash-burning start-ups raise money on public markets at nose-bleed capitalizations and laughable (non-binding) projections, it begs the questions (1) why it's present investors are unwilling to fund it internally at more reasonable private valuations and (2) if the price they are offering you to pitch in at, on the public market, is optimized for current shareholders or new ones. I'd suspect (1) is because they're either ready to off-load their risk or unwilling to burn/risk more of their own cash and (2) it's obviously at the company's and it's present shareholders advantage. Sometimes it works out great, you'd have done brilliantly by investing in a now thriving company when it went public, but IPOs/SPACs are offering sloppy seconds on speculative companies. My style is more akin to buying proven cash-cows at reasonable-ish valuations so I'm probably not the target demographic anyway, but I mostly wouldn't consider buying any newly traded company until people who bought the initial offering are in pain. I'll miss out on lots of boats this way, but I'm at peace with that.
- chii 5y ago
  > My style is more akin to buying proven cash-cows at reasonable-ish valuations if it was so proven, the current valuation would not fall far from the NPV via some sort of discount cashflow analysis. It's still possible to get a good deal, but just as difficult, as only an unexpected growth can give you the returns you want.
woodpanel 5y ago
Doing the same. Partially what also interests me is that the "quant data" is just emerging. Meaning you have a fully new set of key indicators, of facts to look out for when making sense about a possbile investment. OTOH I agree that SPACs are equally useful for fraudsters: Exiting a failing business no professional investor wants to purchase. E.g. [Trigger warning!] the conservative coffee brand "Black Rifle Coffee" is IPOing via a SPAC. I would be really surprised if their grandiose revenue projections materialized without their Trump-base which they have annihilated recently. [Trigger Ending] But that's just one example out of many such SPAC companies, which will slash portfolios of retail investors. And in doing so tainting those SPACs with actual value and prospects.

by cl42 5y ago

chews 5y ago

Your warrant coverage thoughts are very on point, spacs if structured properly are very clever but the lack of transparency on warrants and notes is a problem for the asset class.

cl42 5y ago
...and what's also interesting is how little innovation there is in SPACs. Tells you a lot about how stale/uninnovative the entire finance industry is. Everyone has similar warrants, similar share structures, and even the $10-pre-merger price. AFAIK, there's no reason for all these consistencies beyond copying and pasting the original docs. Anyway, I am tracking a lot of SPACs and waiting about 1-2 years before diving into some of the more promising ones. We'll see how it goes!

Fordec 5y ago

There were a few companies that I was waiting for to go public that ended up going the SPAC route around the time I didn't have extra capital to deploy at the time they went public. Now, I'm just glad I didn't. While I still intend to invest once the knife that is their valuations stops falling and starts to rebound on fundamentals, for now they still have a bit more to lose in their valuation to be in line with the rest of the market on your standard metrics eg. P/E. I'm just not gutsy enough to short the stocks until then. One thing I am now on the look out for is for short-term short squeezes before initial lockup periods expire.

neilarmstonk 5y ago

Perhaps overly cynical but my take is that there’s little relationship between fundamentals and valuations of “exciting” public companies at the moment, and so acting on any grand theory about underlying value is acting in the face of an unfortunate reality: you could be right… and still lose money. You can find example after example of company that is either vastly overvalued, or vastly undervalued, according to any reasonable measure. I have no confidence that I can effectively predict the stock price of one of these companies, and SPACs fit squarely into that category. If I was looking for high-risk high-reward, I’d rather take riskier bets on known quantities.

trophycase 5y ago
Is that why the most profitable companies are also the most valuable?
- pjc50 5y ago
  But the reverse does not hold true: plenty of the highest priced companies don't make a "profit", in the accounting sense. Such as Amazon.
  - ac29 5y ago
    That hasnt been true for years. Amazon has had a positive net income for quite a while. Their margin is small, but not negative.

BbzzbB 5y ago

I'm a small-time retail amateur and consider myself conservative with my portfolio (I stock-pick so that may be generous) so take this with a spoonful of salt. But to me, by buying in SPACs, or IPOs for that matter, one is trying to play VC's game. You're buying companies who have yet to prove their business model, who are likely far off from actual profitability - earnings before everything else (EBITDA) doesn't count - and whose valuations have a ton of future growth front-loaded. That may work if you have deep knowledge of a market, it's participants and how $X company fits in, but I suspect most people buying these young stocks don't have any particular knowledge of them. However with that in mind, the main issue to me is that one would be playing that game after actual VCs had the opportunities to play during private rounds. When cash-burning start-ups raise money on public markets at nose-bleed capitalizations and laughable (non-binding) projections, it begs the questions (1) why it's present investors are unwilling to fund it internally at more reasonable private valuations and (2) if the price they are offering you to pitch in at, on the public market, is optimized for current shareholders or new ones. I'd suspect (1) is because they're either ready to off-load their risk or unwilling to burn/risk more of their own cash and (2) it's obviously at the company's and it's present shareholders advantage. Sometimes it works out great, you'd have done brilliantly by investing in a now thriving company when it went public, but IPOs/SPACs are offering sloppy seconds on speculative companies. My style is more akin to buying proven cash-cows at reasonable-ish valuations so I'm probably not the target demographic anyway, but I mostly wouldn't consider buying any newly traded company until people who bought the initial offering are in pain. I'll miss out on lots of boats this way, but I'm at peace with that.

chii 5y ago
> My style is more akin to buying proven cash-cows at reasonable-ish valuations if it was so proven, the current valuation would not fall far from the NPV via some sort of discount cashflow analysis. It's still possible to get a good deal, but just as difficult, as only an unexpected growth can give you the returns you want.

woodpanel 5y ago

Doing the same. Partially what also interests me is that the "quant data" is just emerging. Meaning you have a fully new set of key indicators, of facts to look out for when making sense about a possbile investment. OTOH I agree that SPACs are equally useful for fraudsters: Exiting a failing business no professional investor wants to purchase. E.g. [Trigger warning!] the conservative coffee brand "Black Rifle Coffee" is IPOing via a SPAC. I would be really surprised if their grandiose revenue projections materialized without their Trump-base which they have annihilated recently. [Trigger Ending] But that's just one example out of many such SPAC companies, which will slash portfolios of retail investors. And in doing so tainting those SPACs with actual value and prospects.