by Travis Johnson, Stock Gumshoe | October 10, 2020 10:41 am
This is premium content. To view this article (and to have full access to the rest of our articles), sign up. Already a member? Log in.
Source URL: https://www.stockgumshoe.com/2020/10/friday-file-is-the-shaq-spac-the-last-straw-or-the-straw-that-stirs-the-drink/
Copyright ©2024 Stock Gumshoe unless otherwise noted.
I found yet another SPAC that looks kind of interesting, even if I can’t find any comments about it: NFIN. They are going to acquire an up and running ethereum based international trade platform. I stared at it and, since I thought I could understand what they’re doing, I bought some of the warrants (which popped this week). I’d think of buying more if I could find some intelligent commentary since they seem to have achieved some real profits already. Anyone know anything?
Sounds like they’re effectively buying an exchange for commodity traders (Kratos), which can be a great fee-generating business, but I don’t know anything else about them.
Thanks Travis! Awesome Friday File! I’ve been an irregular for only several weeks. Haven’t bought much yet because (as you mentioned today) valuations are quite high right now. My timeframe is 5-8 years so i am trying to be patient and will buy on weakness. Gives me time to devise my strategy. Love your service so far!
Dear Travis,
I think most of your members know how to buy and sell stocks, just like me for example. However investing in SPACs , with regard to how to exercise the warrants into the class A common stock does need some understanding and some extra works involve. Either gets a full potential of the warrants by doing it right or lose the whole investment of warrants by being ignorance. You are a very knowledgeable guy, you need to explain to your members in great detail so they all know what to do when the time is right to EXERCISE THE WARRANTS. Give an example is even better,
Ignorance and stupidity on my part cost me money in the DKNG case:
From DEACW to DKNGW then to DKNG. This process requires extra work and understanding. I missed the last step. What I did, I sold DKNGW and then bought DKNG rather than exercised DKNGW to
DKNG!
Selling and exercising warrants should lead to roughly the same short-term returns, theoretically, but there are plenty of situations where that is temporarily out of wack. Do not ever buy into a SPAC, or a SPAC merger that is announced and underway or already completed, without reading the SEC registrations — every warrant and every SPAC can be different, though most of them do generally mostly follow similar models when it comes to things like strike prices, warrant terms, and early redemption clauses.
In my experience, the two things that often make warrants trade at odd prices (ie, something other than “the current share price minus the strike price, plus a market-driven “time value”, just like call options) are early redemption rules, and sometimes, in odd cases, registration timelines.
Early redemption clauses mess up SPAC warrant investors with some regularity. Usually, in the initial prospectus for a SPAC, there will be some sort of clause allowing the SPAC to redeem warrants early (before the typical five year period is over), and the most common criteria used for this is “if the stock is above $18 for 20 out of any 30 trading days”. Investors often get confused because this can come in a couple forms:
1. The SPAC can set a new deadline, and at that date force redemption of the warrants for one penny, which means they’re telling you that if you don’t exercise your warrant before the new date they give, they will cancel the warrant and pay you a penny for your trouble. This is obviously crazy for a stock that’s been trading at above $18 and a warrant that should therefore be worth at least $6.50 (since the strike price is almost always $11.50 per share), but they do this because they want to force you to exercise your warrant before that new date… usually, an early redemption like this means that the company thinks it will also eventually need that extra cash (the $11.50 per share that you’d pay to exercise your warrants). The trick with these situations is that you have to act — if there’s a new expiration date for this early redemption, and you do not either sell your warrants before then or exercise them, they will be redeemed for a penny and you’ll be out of luck.
2. The SPAC, alternatively, can choose a cashless redemption — this is usually what they opt to do if they don’t particularly need a lot more cash, and they just want to get rid of the overhang of the warrants. A cashless redemption would mean that they effectively just turn your warrants into shares at some fair proportion based on the price leading up to that moment. So if the shares are at $20, for example, and the warrants are therefore trading at $8, the ratio would be something near 40% — if you had 100 warrants, they would roll those over through this cashless redemption to become 40 shares of the underlying stock. Roughly speaking. Usually if this is the path the company takes, you don’t get any option and you don’t have to take action, it is done automatically and the warrants just become (a smaller number of) shares in your brokerage account.
You do not usually get to choose between 1 and 2, the company will tell you what they’re doing. You just have to receive their notifications and act appropriately.
And why do the warrants and shares sometimes not trade at something like a rational price for short periods of time? Sometimes it’s because that early redemption or cashless redemption has already been announced, and the warrant conversion ratio already set… or sometimes, if it’s much earlier in the process, the stock can just be trading with wild volatility but the warrants can’t actually be exercised yet, so they don’t always follow precisely.
This can happen right after a SPAC conversion is finalized, particularly if it’s one where they had a lot of redemptions (SPAC holders requested their $10 back instead of going through with ownership of the new company), because in those cases sometimes there aren’t many free-trading shares (insiders and those who participated in the private placement as part of the deal had their shares locked up for a period), so the few shares that are available trade wildly… and the warrants can’t yet be exercised because the new shares that will underly the warrants haven’t been registered with the SEC yet (there’s always a short delay while new shares are registered for trading, but sometimes it’s longer — like during the government shutdown a couple years ago when the SEC was bogged down). Phunware is the most recent example of this that I recall, you can look that up (PHUN) to see what the crazy impact was on the shares — that kind of thing is unusual, but it does happen (Phunware’s merger closed on January 2, 2019, but as I recall the shares were not officially registered with the SEC, and therefore the warrants couldn’t be exercised, for several months — until May of that year, I think).
Thank you very much for your detail explanation of redeeming or exercising of warrants. Before I asked you this question I did googled it to better educated myself. Now I think I am pretty well equipped to invest in the SPACs.
Travis, this explanation should be a sticky note so it’s easily found. Nicely explained!
Quantun was very interesting and have followed a some, focued around abundant materials is interesting comment but no mention of what, where mined and is it imported. Very important, since Elon is pushing Nickel production now, I feel PM for the EV market is very important but I find little shared information.
Great article as always.
Edward
I really enjoyed the sidebar of historical survivor bias examples. I try to spot things of that sort in everyday life, as they happen, though I can’t claim to be very good at it. Fascinating stuff.
Oh, and thanks for the usual rundowns, outlooks and market musings as well.
I second that. Even sent an excerpt of the sidebar to my Mom!
Great post Travis, loved the “philosophical conclusion”. We certainly need advice such as that while we are all under “house arrest”.
Regards,
Frank
Hi Travis, I have been a subscriber for a few months now. I am 20 years old, and from Australia. I have recently been looking at purchasing some US companies, as I am currently only invested in the ASX. I was hoping you could please provide a possible ‘top three picks of the moment’? This would be for a young ‘buy and hold’ investor with a long-term horizon.
Thanks.
Hi Taylor… sorry, I can’t provide individual advice. I can tell you that if you’re 20 years old and can really be a “buy and hold” person, time is your friend and you can buy almost anything — you have decades to make up for your mistakes, and when you look back in ten years the amounts you’re investing today will almost certainly look small, even though the weight of it now might seem substantial today. Take the chance to make your mistakes now by being too aggressive or too excited, it won’t hurt you much if you’re wrong and the earlier you learn valuable lessons about how you handle the emotional ups and downs of investing, the better.
I don’t give advice, but I do try to be transparent so that my personal investing decisions are clear — since what I do with my actual money is a more accurate measure of my sentiment than just an “I like it” or “meh” opinion I might write in an article. I usually invest gradually with microdosing into most of my positions, and I expect most of my holdings to do well over the next decade or I wouldn’t have bought them, but the most recent investments I’ve made that were bigger than just a microdose buy (ie, bigger than roughly 1/10th of one percent of my portfolio) were additions of new positions in Goosehead, Stitch Fix, Chewy and Unity Software, and larger add-on purchases in Crown Castle, Amazon, Brookfield Asset Management, Roku, Hipgnosis Songs Fund and Universal Display.
Motley Fool is a buy and hold advisor service. You can look at the holdings in a couple of their ETF’s and decide which ones you like. TMFC and MFMS. There are lots of investing channels on Youtube to check out also. A couple I like are Learn to invest and Ale’s World of Stocks.
Thank you for all your research Travis! I am going to like it here!
well reasoned and well written, as usual.
Wow, that was a journey! I really appreciate your work Travis. I’ve also done a lot of “parking” of cash into SPAC units and then selling them at $12 or better before anything happens. In tax-free accounts that quite a gift and because they are backed with cash you can have a large position as long as you are buying it close to the $10 issue price. I don’t know how long this will last (maybe as long as rates are this low) but right now it’s “rinse and repeat” to a better retirement.
Dear Travis,
As I predicated, if FSLY gets 12% revenue from TIK TOK, any things happens to Tik Tok, FSLY will be affected.
May be it is about time to get some shares now?
A 12% drop in revenue hardly deserves 30% drop in stock price. Or maybe price just gone up too fast this month for FSLY.
Where do you find the strike price and date for the Monocle Acquisition warrants? The company doesn’t appear to have a website.
In the prospectus filed with the SEC. general, most SPACs use the standard warrant terms — five years from the business combination date, $11.50 strike price.