Dave Forest at Casey Research is selling his Strategic Trader newsletter ($1,750, no refunds) by promising new subscribers a report about how to profit from the warrant windfalls that Jeff Bezos has engineered for Amazon.com (AMZN). This ad presentation takes the form of an “interview” with Chris Hurt, a Disney-trained host who may look familiar because he’s been hired to add some production value to the ad pitches of several different Marketwise (MKTW) pundits in recent years, including Jeff Brown (MarketWise is the publicly traded parent company of many of the old Agora-affiliated newsletter publishers, including Stansberry, Casey, Investorplace, Bonner, Empire Financial and Palm Beach)…

… and sadly, this particular “presentation” did not include a nice skimmable transcript, so I had to listen to the entire thing in order to parse out some clues for the Thinkolator to work with. Well over an hour of syrupy infommercial. Remember that next time you’re thinking to yourself, “I wonder if Travis really loves me?”

Since we don’t have a transcript, I’m working just from my notes from the presentation… so we don’t have much in the way of direct quotes, but bear with me, we should be able to ID this investment for you.

The big picture is that they are pitching warrants, and pitching a warrant investment as a way to earn either “49 years worth of gains” or “49X returns” in one go, depending on which bit of hyperbole you listen to. That’s possible in the most extreme cases, but, of course, we’ve all been in this game long enough to understand the vast gulf of difference between “possible” and “probable.” And Forest has certainly pitched warrants before, a while back he was spinning a similar tale about some mining stock warrants and calling them “Gold Placements” or “Q Shares.”

What is a warrant? A warrant is sort of like a call option, it gives you the right to buy a particular stock, at a particular price, for a set period of time. Warrants have been around for a long time, most of the time they exist as a sweetener for investors to convince them to take a risk — so a private placement that raises money for a risky mining explorer might include both shares and warrants to convince the investors to bite. Most publicly traded warrants these days are from SPAC deals — almost every special purpose acquisition company comes public with some form of warrant attached to the initial units, basically as a way to sweeten the put and convince investors to put their cash into that SPAC blank check pool for two years, and most of those warrants are fairly standard in form — the SPAC raises money at $10 a share, and included in the SPAC units are warrants (maybe a full warrant, maybe a fifth of a warrant per share, it varies), with each warrant giving the holder the right to buy the SPAC equity shares for $11.50 for five years. The expiration clock starts ticking when the SPAC has met its purpose, when it has found a company to merge with and consummated a deal, so almost every company that came public through a SPAC merger like this, or will come public in the next few years, will also have a five-year publicly traded warrant available to anyone.

So a warrant is a form of leverage — and thanks to the fact that they can give you five years of leverage they used to be regularly undervalued, partly because people didn’t trust SPACs, which were an odd little financing vehicle that you didn’t see very often… but the explosion of SPACs last year and this year, and the wild chase for huge returns during the SPAC bubble earlier this year, made a lot of new investors and enthusiastic speculators familiar with the warrant structure, and more than ready to bid up warrants to sometimes genuinely nutty prices.

The fact that the vast majority of publicly traded warrants are connected to SPACs probably means that Dave Forest is teasing one of those, but there are occasionally other warrants out there — we’ve had good luck (and bad luck) with occasional warrants on mining companies, and the TARP Warrants that came out of the 2008 financial crisis provided some nice windfalls (the government bailed out the banks, and took warrants in return, then a couple years later listed those warrants and started selling them into the public markets), so let’s see what kind of hints they drop in the presentation.

The basic theme is that these are Amazon-connected warrants, and that’s something that has gotten a fair amount of press attention over the years. Amazon often makes deals with suppliers or service providers, offering to bring them a huge amount of business, but part of what they do with that vast leverage they have over these companies is insist on a warrant deal as a sweetener. That’s mostly what Forest is talking about when he pitches the idea that Amazon is making “can’t lose” investments — they offer to make a deal with a company, but take warrants as their pound of flesh… and then once that company is publicly connected to Amazon the shares often shoot higher, because investors see that the company gets both the endorsement and a surge of revenue from Amazon, and therefore the warrants surge higher, too. In the presentation they describe this as Bezos “forcing his best investments to shoot higher.”

There have been at least half a dozen of these kinds of fairly high-profile investments by Amazon in the past that included warrants, from Plug Power to Canada’s Cargojet to grocery distributor SpartanNash, and with lots of retail brands and smaller private companies who want to work with Amazon (they’re not the only ones who do this, effectively forcing warrant deals on their business partners – Walmart sometimes does similar deals, for example — but it seems to have been a bigger focus at Amazon over the years).

And Forest teases that these have all been private warrant deals… but that this time around, you can get the same kinds of warrants that Amazon is getting, on the same company. And that’s the juicy bait… can you get a massive return from another of Amazon’s “can’t lose” deals?

Amazon actually has active deals with more than one company that has come public via SPAC in recent years, and has more than one current “public” warrant deal in place, but we are being teased about just one… what are the specific clues?

This next deal promises to be even bigger, because it’s an electric vehicle deal. They need a lot of trucks, and this little electric truck company fulfills Bezos’ climate pledge, and he wants to accelerate the market for electric vehicle technology. Next year Amazon will have 10,000 electric vehicles, and they’ve pledged 100,000 by 2030 in their delivery fleet.

So it’s some kind of electric vehicle deal — Amazon has a few partnerships with EV companies in place right now, the most high profile is with Rivian, which is planning to go public very soon, but there are others.

And Forest mentions that they’ve done something very similar before, with Plug Power (PLUG), which is part of why he sees it as a “no brainer” — that’s not really an EV company, but Amazon did post a huge gain from PLUG as a result of their deal a few years ago, and in fact they may have made more from the warrant stake in Plug than they ever spent on buying Plug Power’s products.

From a Motley Fool article a few months ago, it sounds like Amazon has now taken its PLUG warrant profits, just FYI…

“It’s unclear at what price it sold its shares. Amazon likely netted at least $1 billion in the deal, as Plug Power shares have been trading at around $25 for most of 2021. The tech giant reported an equity warrant valuation gain of $1.5 billion in its other income in 2020, much of which was likely from Plug Power. In Q1 2021, it reported a $305 million gain under the same line item.”

Everyone watches what Amazon does, so there has been more attention paid to their various warrant deals in general, too — there was a good story about that in Bloomberg back in June, if you’d like a little background.

But anyway, what other clues do we get, aside from the fact that it’s an EV company, Amazon has warrants, and there are also publicly available warrants? This is what I’ve got in my notes:

“When this tiny EV company reports earnings in mid-November, I expect they’re going to announce the deal with Amazon, and when that happens all hell could break loose as investors pile in.

“Amazon could give this tiny company over one billion dollars of business over the next few years, actually $1.1 billion

“It’s over 300X smaller than Tesla. I assume what he means is ‘smaller than 1/300th the size of Tesla’

“This company brought in $17 million in revenue last quarter, but no money from Amazon has hit their results yet. Next time they report and include the Amazon deal, they could announce that their revenue exploded 12X.

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And, of course, the key tease: “We can play this with warrants, and I believe we have the chance to make up to 49X our money.”

So… who is it? This is the little Canadian electric truck company Lion Electric (LEV), which got a little bit lost in the shuffle last year as all the EV attention drifted to shinier objects like Rivian and Hyllion and Workhorse and Nikola (and I’m probably forgetting a few). And yes, Lion did go public through a SPAC merger, announced last November and closed in May of this year, and there are publicly traded five-year warrants available to investors… and they do also have a deal with Amazon, and Amazon owns warrants on Lion Electric, too.

And just to put the mustard on the hot dog, yes, they did have roughly $17 million in revenue last quarter ($16.69 million, technically), a number that is widely expected to grow very quickly as they ramp up revenues (analysts are projecting $26.5 million for this next quarter). And they are reporting in mid-November (November 10 is the plan), and their market cap is about $2.5 billion, so Tesla, with a market cap of about $750 billion a few weeks ago is “more than 300X larger” (TSLA has shot higher again, thanks in part to the announcement that Hertz is buying 100,000 Teslas for its rental fleet, so the market cap is now approaching a trillion dollars, but that news came after this “infommercial” was in the can).

What’s the nature of Lion’s agreement with Amazon? Lion Electric started as a maker of electric school buses, but is building larger electric delivery trucks as well — these are Class 6 and Class 8 trucks, a little bit bigger than the neighborhood delivery vans that Amazon is buying from Rivian, more like an urban delivery panel truck (with a base that could be used for other kinds of vehicles, like garbage trucks). As part of the SPAC deal that Lion made last year, when they announced that they were merging into the Northern Genesis Acquisition blank check company, the nature of the Amazon relationship was disclosed in more detail — Amazon had an initial order of ten trucks and has booked the right to buy 10% of Lion’s production, which they envision will be at least 500 trucks a year, and Amazon got warrants which gave them the option to buy up to 20 percent of the company (since diluted a bit, but I think it’s still about 15%).

Is Lion appealing? They do have an established business, with roughly 400 vehicles on the road, they are building out manufacturing capacity for both battery packs and for the trucks themselves in Canada and the US, and they have a fair amount of expertise following a decade or so of getting their electric school buses built and sold… and, yes, they have a bunch of orders from Amazon and from a number of other major partners, which should help. Whether that makes an unprofitable $2.5 billion manufacturing company attractive, at probably something like 5-10X 2022 revenues, is your call to make.

Analysts are pretty optimistic, they see these early orders and the expanded manufacturing capacity bringing in a billion dollars in revenue in 2023, which they think will be enough for Lion to turn a profit… though they are not, no surprise, quite as optimistic as Lion was when they did their initial SPAC presentation last year (those presentations are always wildly optimistic — at the time, Lion was projecting $1.7 billion in revenue in 2023. And when it comes to immediate numbers, Lion was originally projecting $200 million in revenue in 2021, and analysts now think they’ll come in closer to $90 million).

It would not be at all surprising if the progress is a little slower than they’re forecasting, building a new factory and creating a supply chain and making sales often takes longer than anticipated, and we’ve certainly heard of plenty of delays and supply chain problems from established manufacturers… but if they can grow to something like that billion-dollar revenue number, whether it takes two years or a little longer, I expect the shares (and warrants) will probably do quite well… though this attention from Dave Forest has already driven the warrants to the point that they’re pricing in really strong returns.

The warrants that are available for trade at LEV/WS or LEVWS are five-year warrants (expiring in May of 2026), and all of the publicly traded ones are redeemable, which puts a little bit of a lid on the leverage. Unlike most SPAC-merged companies, Lion is also listed in Canada, with the same stock ticker, so you’ll also see the warrants at LEV.WT in Toronto.

That early redemption clause is pretty standard for SPAC warrants — usually the SPAC sponsor gets warrants for themselves, and sometimes for additional early investors, which are not redeemable, but usually the ones that are sold to outside investors and publicly traded have an early redemption “feature.”

For Lion, that clause reads, “The Company may redeem the outstanding public warrants after they become exercisable, in whole at a price of $0.01 per public warrant, provided that the last reported sales price of the Company’s common shares equals or exceeds $18.00 per for any 20 trading days within a 30 trading-day period commencing once the public warrants become exercisable and ending on the third trading day prior to the date on which the Company gives proper notice of such redemption.”

So basically, if the stock price is above $18 for a month or so, expect an early redemption. Warrant holders need to read their mail and pay attention, because even if the warrants are valuable (they’re “in the money” by about a dollar right now, since the share price is around $12.50), they can be redeemed for a penny if they opt for early redemption and you choose not to either sell or exercise your warrants before that redemption. That happens to real people all the time, and it stinks, so if you own warrants pay attention.

The private warrants owned by the SPAC sponsor are not redeemable, naturally, the sponsors always get the sweetest part of the deal. And the Amazon warrants, which they call “customer warrants,” are also different. Here’s how those Amazon warrants are described in the SEC filings:

“On July 1, 2020, in connection with the entering into of a master purchase agreement and a work order (collectively, the “MPA”) with Amazon Logistics, Inc., the Company issued a warrant to purchase common shares of the Company (the “Specified Customer Warrant”) to Amazon.com NV Investment Holdings LLC (the “Warrantholder”) which vests, subject to the terms and conditions contained therein, based on the aggregate amount of spending by Amazon.com, Inc. and its affiliates on Lion’s products or services.

“At the election of the Warrantholder, any vested portion of the Specified Customer Warrant can be exercised either on a cash basis by the payment of the applicable exercise price or on a net issuance basis based on the in-the-money value of the Specified Customer Warrant. The exercise price of the Specified Customer Warrant corresponds to $5.66. The Specified Customer Warrant grants the Warrantholder the right to acquire up to 35,350,003 common shares of Lion representing approximately 15% on a partially diluted basis of the issued and outstanding common shares of Lion.

“There was an initial vesting of a portion of the Specified Customer Warrant which is exercisable for 5,302,511 common shares of Lion. The remaining portion of the Specified Customer Warrant vests in three tranches based on the aggregate amount of spending by Amazon.com, Inc. and its affiliates on Lion’s products or services. The Specified Customer Warrant has a term of 8 years ending on July 1, 2028. Full vesting of the Specified Customer Warrant requires spending of at least $1.1 billion on Lion’s products or services over the term of the Specified Customer Warrant, subject to accelerated vesting upon the occurrence of certain events, including a change of control of Lion or a termination of the MPA for cause.”

So yes, you can buy a Lion Electric warrant that’s kind of like what Amazon has, but the terms are different. You don’t have as much flexibility as Amazon does, your strike price is twice as high, and your warrant can be redeemed early. Though, to be fair, Amazon does have to earn its warrants by spending $1.1 billion buying trucks from Lion over the next eight years, and all you have to do is go to your brokerage account and buy warrants.

Should you? That’s your call… though do note that the attention from Dave Forest in the past few days has driven the price up a bit, so it would probably behoove you to do your math. Lion Electric right now is at $12.70, and the warrants to buy the shares for $11.50 are priced now at $4.12. Which means that in order for the warrants to pay off for you, you need the shares to rise to at least $15.62 (the $11.50 strike price, plus the $4.12 you paid for the warrant). Of course, if the shares got to $15.62 that would also mean a gain of about 24% for the stock, so in order for the warrants to be a better deal than the shares, return-wise, you’d need the stock to hit the $17 neighborhood, which is close to that redemption threshold. That means unless the stock shoots pretty quickly higher and overshoot that level, you’re at some risk of having your warrants redeeemed and losing your leverage at very close to the same time that the warrants become a more lucrative investment than the shares.

The warrants came very close to hitting the early redemption threshold right after the deal closed in May, but they were not redeemed. There is a lot of possible upside if the stock shoots higher, well above $18, but it probably won’t last for very long — the warrant redemption would require some notice, and in the meantime the warrants remain in effect, so if the warrants go to $18-20 and just stay in that area for a couple months, you’re likely to top out at something pretty close to 100% gains from the warrants (if the redemption kicks in when the shares are at $20, that means the warrants would be worth $8.50 ($20 minus the $11.50 strike price), and that is roughly a 100% gain from $4.12).

The rosier upside possibility is that the shares could catch fire again, like they did during EV/SPAC mania back in January and February, and go much higher — and that has certainly happened a few times in the past couple years (quite dramatically with DraftKings, for example, in 2019), but it requires some luck and fast share price appreciation. If the shares go to $35 before the company has had time to hit the redemption criteria or issue the redemption notice and have it go into effect, then the warrants could easily go to well over $20 ($35 minus $11.50 strike price would be $23.50, almost a 500% return from $4, versus what would be “only” about a 200% gain for the shares as they go from $12 to $35).

Jeff Bezos will be fine either way, he doesn’t have to worry about that redemption right and he can wait for years to redeem if he wants to, waiting to see how the first order of Lion trucks goes for Amazon and if they want to exercise their right to buy thousands more in the next decade… but individual warrant holders are a little bit more confined. It still might work out very well if Lion shares soar higher, either on the next earnings announcement or at some other time, that redemption clause just puts a second level of pondering into effect for investors.

And, of course, stocks don’t only go up. If things get ugly for a while, or Lion announces that their production is another year behind schedule for whatever reason, well, the negative leverage of warrants can always kick in, too (if the shares fall 30% or so, from $12 to $8, the warrants would very likely fall by at least 50%-75, probably getting to the $1 range). The five year term means that the patient investor can still wait and see if those warrants become profitable in the future, but that doesn’t mean the huge drop is fun. Just remember that leverage is never free.

If you’re interested in other Amazon-related warrant deals, the only other one I’m aware of that’s trading right now is with Plus, also sometimes called PlusAI — that’s an autonomous driving company designing self-driving truck systems for long-haul trucks in the US and China, their most well-known competitor is the US-only TuSimple (TSP). Amazon placed a big order with Plus, and in exchange it received warrants in the company, and Plus is planning to go public through a SPAC merger so has warrants trading as well (though the SPAC merger has not closed yet, so there is that additional risk that it could fall apart). If Amazon increases its Plus orders in the future, they could reportedly buy up to 20% of the company, so again, you can see that Amazon has somewhat of a blueprint for these deals with startups who want Amazon to be a foundational customer.

Plus is in the process of coming public through a merger with a SPAC called Hennessy Capital Investment V (HCIC). Hennessy Capital Investment V also has warrants trading, under the ticker HCICW, and those warrants give holders the right to buy the underlying stock, and it looks like they have the same standard SPAC warrant terms as the Lion Electric deal ($11.50 strike price, five-year term, early redemption trigger at $18). Their investor presentation is here if you’d like more info, investors are not as enthused about this one at the moment and the price of both shares and warrants are lower (roughly $10 for the shares and $1.20 for the warrants at the moment).

So… interested in buying some leverage on these transportation technology companies that Amazon is working with? Feel like Forest’s teased Lion is as great a deal as he says? Let us know with a comment below… and thanks for reading!

Disclosure: Among the companied mentioned above, I own shares of Amazon.com. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.