SPACs: A Major Trading Opportunity

You can’t go anywhere these days without hearing about “SPACs,” and there’s a good reason for that.

Wall Street refers to these by their technical name, “Special Purpose Acquisition Companies,” but I see them for what they are: “New Age IPOs” that can give retail investors a way to cash in on newly minted companies.

Wall Street and retail investors alike had a stellar run with SPACs last year, and now SPACs are outdoing themselves this quarter, becoming one of the hottest trading opportunities on the market right now, yet so few people know about SPACs.

This is a major trading opportunity I don’t want you to miss. So, here’s what’s in store for you this week:

I’ve got three special reports on SPACs – what they are, how to play them, and a recommendation to round off the whole series – heading to your inbox over the next few days.

You’re going to get the all-inclusive, grand tour of SPACs. Ins and outs, nooks and crannies… my team has researched it all so you don’t have to.

Today, you’re going to get to know SPACs, get friendly with them, so you know what you’re trading and why before we launch into how to buy and how to profit.

So, do you want to cash in?

A Pool of Profits

SPACs were one of the biggest moneymaking stories of 2020, with a record $157 billion worth of SPAC deals done, which was more than all the deals done in all the years before that.

And the SPACs that won… Well, I’ll let the numbers speak for themselves:

  • The Diamond Eagle buyout of Draft Kings Inc. (NasdaqGS:DKNG): Run by media executive Jeff Sagansky and founding investor Harry Sloan – longtime dealmakers and media operators – this play on sports betting delivered a 700% return on its initial public offering (IPO) price.
  • The Kensington Capital buy of QuantumScape Corp. (NYSE:QS): Driven by executives from the auto industry, this driverless car play buying a lithium battery company was a 12-bagger, a fun of saying at its peak last year the stock traded at 12 times its IPO price, yep, that’s 1,200%.
  • When Kayne Anderson snagged Altus Midstream Co. (NasdaqGM:ALTM): Investors who are experts in the midstream slice of the energy market gave investors a 530% windfall.
  • And the Fortress Value Acquisition buyout of MP Materials Corp. (NYSE:MP): The backers of this SPAC deployed their private-equity expertise in the rare-earth mining sector and delivered a 450% return on the IPO price.

As crazy as last year was for SPACs, count on this year to be much, much bigger. In just the first few months of 2021, we saw more of these “New Age IPOs” than in all of the record-breaking 2020.

That’s right. More than $157 billion has been raised in SPAC IPOs between January 2021 and today.

This is an explosion we ought to get in on, but before you can make your money move you need to understand just what SPACs are and how they work.

SPACS 101

As much as I refer to SPACs as “New Age IPOs,” it’s more accurate to call them “blank-check” companies.

A SPAC sponsor does an IPO to raise the cash needed to go out and buy an operating business. And while there is sometimes a general stated purpose or theme for the SPAC, the fact is prospective target companies SPACs eventually go after with their blank-check money, are not ever identified in the IPO. At this point in the process, they aren’t even known to the sponsor.

Because there isn’t an operating company being IPO’d, there’s no need for the usual due diligence and breaking down and disclosing a company’s products, markets, financial condition, prospects, and risks. It’s just a capital raise to bankroll the merger of a to-be-determined target acquisition.

That makes bringing out SPACs a lot faster and easier than traditionally IPOing an operating company.

As an investor, you might be buying into the “theme,” or sector, or space the IPO sponsors are targeting if there’s one proposed. But for sure you’re betting on the sponsors’ and “founders’” ability to find hot companies to buy and operate them super-successfully.

The best sponsors have a track record or specific expertise to bank on, so researching these individuals is key, but we’ll get deeper into that in tomorrow’s report.

One very cool thing about SPACs is you can buy shares with “warrants” attached. Warrants are securities that give you the right to buy additional shares, usually a third or maybe a half of a share – each IPO deal is a little different.

Generally, the warrants, which if they aren’t attached when you buy shares of the SPAC, can also be bought through any brokerage service once you have the SPAC’s ticker symbol. The warrants themselves are kind of like call options, they give you the right, but not the obligation, to buy shares of the SPAC usually at a 15% premium to the IPO price, which is most commonly $10.

So, if you end up with at least three 1/3-of-a-share warrants, whether they came attached to shares you bought, or you buy the warrants separately, you can convert them to a share (or lots of shares if you have lots of warrants) for $11.50 per share, which is fantastic, if as was the case with QuantumScape Corp., it was trading at more than $120 per share. Last year.

With most deals done at $10, most of the warrants are five years in length with an $11.50 strike price.

With a winning SPAC, those warrants can serve as one heck of a kicker: If the stock goes to, say, $50, you’d, first of all, make $40 on the stock and second, another $38.50 on the warrants.

On a $10 investment, that’s a massive windfall.

Like I said up top, sponsors may identify an interesting social, economic, or demographic trend they want to take advantage of with the proceeds. The sponsors and the management teams they bring in will often have experience in specific sectors – like fintech, electric vehicles, consumer goods, restaurants, energy, logistics, or even casinos to name a few.

Here’s the “wild card.” The prospectus for all of these deals makes clear that these sponsors may target a certain business type or theme, but they actually have the wherewithal to invest in virtually anything they like.

SPAC sponsors have a specific time frame to get a deal done. Most are 24 months, but there are occasions where the time horizon is extended, for example, if a deal is pending a shareholder vote on approving the acquisition.

While sponsors are hunting for a company to buy, the IPO proceeds are held in a trust and invested in U.S. Treasury securities.

If no deal is made in the required time frame, the cash, plus interest, because the Treasury securities the trust invests in pay interest, is returned to shareholders. While every SPAC deal is a little different, and some sponsors use some of the IPO proceeds to pay for underwriting, some legal and accounting, and other specified expenses, there can be a little less than $10 per share in the trust account, or more, depending on expenses paid out and interest earned.

If an agreement is reached on a deal, meaning the sponsors and target company agree on a price and terms for the operating company, and additional financing, which is usually needed since most targets cost more than just the capital raised in the IPO, are put in place, the whole deal must be approved by shareholders before it can be consummated. If it’s a deal you as a shareholder in the SPAC don’t like, perhaps because they invested in a theme or business you aren’t interested in, you can vote “no,” and redeem your shares and be paid out of the trust.

In other words, if you like the deal, vote “Yes” and keep your shares in the new company.

If you hate it, get your money back.

If you buy the IPO or buy in the aftermarket when shares sometimes trade at a discount to the value of the shares in the trust, the worst that can happen – absent blatant fraud by the sponsor – is that you get your money back, or better yet, your money back with interest.

In most cases, even the so-called “worst-case” will leave you with more than you could’ve earned in a passbook-savings account over the life of the SPAC.

But as we’ve already seen with some of the biggest recent winners, if the SPAC team strikes a great deal, you could see returns of 400%, 500%, or more.

To do this – to win big consistently and to squeeze out as much risk as possible – you need a powerful-but-easy-to-follow strategy.

I have one.

A great one, in fact, and I’ll bring it to you tomorrow in the next installment of this report.

So, stay tuned.

— Shah Gilani

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Source: Total Wealth