With the investment of brilliant Charlie Munger he believes the world would be better off without SPACs, saying this week that “this kind of cunning profiteering” is a sign of “humble bubbles.”
But in the right hands, they offer an easier route to market than the traditional IPO route for hardware companies. They can make a good investment. The key is that you need to know how to separate the wheat from the chaff.
This is a guide to what to look for in SPACs, or special purpose construction companies, called blank check companies that come public with the intention of bringing in real companies.
SPAC Support No. 1: Look for winners in the mix.
SPAC Power Enterprises EOS Inc. EOSE,
almost doubled in a month after I mentioned it in my stock letter, Brush Up on Stocks (the link is in the bio below) on December 10, and it’s still up about 44%. I liked it at the time because of a purchase by Bryant Riley of B. Riley Financial Inc. RILY,
inside I like to follow for my stock letter.
EOS Energy may have a bigger grip now, but here’s a new SPAC that looks attractive.
In biotech, I always like to take a close look at what Contemporary Advisors do, because like Riley, they have a good track record. Perceptive is supporting a new biotech SPAC called ARYA Sciences Acquisition IV ARYD,
their fourth man. I don’t know what to do with it. But with their record, the odds are good it will pay off for investors.
It is also a bullish sign that this SPAC has high-end investment banks that handle initial public offering (IPO), in Goldman Sachs Group Inc. GS,
and Jefferies Financial Group Inc. JEF,
SPAC Support Number 2: Look for SPAC sponsors who have good records.
This is a variation on the above technique, but here you are aiming for a specific history just in SPACs. One that stands out is FS Development Corp. II FSII,
led by healthcare investors at Foresite Capital. Former healthcare division of SPAC Gemini Therapeutics Inc. GMTX,
up nearly 50% in three months. Gemini is developing a potential treatment for age-related macular degeneration (AMD).
Also consider Alpha Healthcare Acquisition Corp. AHAC,
led by Rajiv Shukla. Its former biotech SPAC, DermTech Inc. DMTK,
has recently risen 640% since its launch in 2019. Shukla’s Alpha Healthcare is teaming up with Humacyte, which develops nappies and biodegradable human organs that may not the recipient groups refuse. Its first results can be used in bypass heart surgery, pediatric heart surgery, and type 1 diabetes.
AHAC raised above $ 14 in February, but is now down near $ 12. Alpha Healthcare will soon be trading under the HUMA ticker.
Those visual Advisors SPAC ARYA Construction Sciences IV I mentioned above also fit here. Visual record in SPACn? A Physical Sciences Arya Corp. ARYA III,
it’s up 60% to $ 16 after trading in the $ 10- $ 11 range for the second half of last year. This one comes with a company called Nautilus that is developing a platform that will better analyze proteins in the body. This should help researchers better understand diseases and potential treatments for them. Arya Sciences Acquisition Corp III changes its ticker to NAUT.
SPAC Tactic Number 3: The best SPACs backed by professional investors who manage a lot of money.
In their research paper “A Sober Look at SPACs,” SPAC experts Michael Klausner, Michael Ohlrogge and Emily Ruan at Stanford University and New York University School of Law define “quality” SPACs as those backed by investors. who manages a lot of money. Their cut is $ 1 billion, but any major investment store fits the bill. The theory is that if sponsors have attracted a lot of money, they may have a good investment history and a reliable level of experience in investing.
One example here is Pershing Square Tontine Holdings Ltd. PSTH,
founded by Bill Ackman at Pershing Square, a major investment fund that has made many calls over the years. Another is 23andMe coming public through VG Acquisition Corp. VGAC,
It is being founded by Richard Branson of Virgin Group.
SPAC Tactic No. 4: Favorite SPACs managed by former CEOs or chief executives of successful companies.
The SPAC experts from Stanford and NYU mentioned above also define “quality” SPACs as those led by vice presidents or chief executives of large companies.
A good example here is the telecom and tech SPAC Colicity Inc. COLIU,
Colicity is led by Craig McCaw, of the telecoms McCaw Cellular Communications, Nextel Communications and Clearwire. Colicity is also getting a good run for the sponsorship support strategy, as does SPAC telecom and McCaw’s other tech, Holicity Inc. HOL,
it is up more than 60% from the $ 10 range it traded through November-January.
Another who inspects the box here is Hedosophia Holdings Corp. IV IPOD,
founded by Chamath Palihapitiya, former CEO of Facebook Inc. FB,
SPAC Support No. 5: Dodge the flood of warranty weakening.
As I said in my column on hidden risks in SPACs, an important problem with SPACs is that initial investors, such as hedge funds and Wall Street insiders, get one guarantee for every installment they buy on the IPO. That creates a huge deal if the stock does well. A warrant has the right to purchase an allotment at a pre-set price – usually $ 11.50 for SPACs that go public at $ 10. When people use warranties, new shares are created, which means a lot of narrowing for other shareholders.
The simple way around this is to avoid SPAC which provides a warranty for each category in a 1: 1 ratio. Not only do you avoid weakening, but for me, there is very little use of warranties or zero as a bullish investment signal. He suggests that SPAC supporters have a reputation for not having to reach out to attract investors – by offering these free guarantees.
An example here is the telecom and tech SPAC Colicity mentioned above. He offered one-fifth workable warranty at $ 11.50 when he launched his IPO this week, instead of one warranty for each share of the stock. Another one called FinTech Acquisition VI, which filed on Wednesday, is offering a quarter of a viable warranty at $ 11.50. (It trades under the FTVIU ticker.)
Better yet, just go with SPACs that offer zero warranties. Two examples, already mentioned above because they explored the boxes for other innovations, are Foresite Capital’s FS Development Corp II and SPAC ARYA Construction Sciences IV Visual Advisors.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned EOSE and RILY. Brush has recommended EOSE RILY GS JEF FB in its stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.