The following article is an excerpt from a recent Sector Xpress Greentech Advisor which explains SPAC arbitrage opportunities. To see the 6 best green tech stocks undergoing SPAC mergers subscribe today.
In 1998, investors had more than 7,500 publicly traded companies to choose from on U.S. stock exchanges. Since then, the number has declined to about 3,500. At their peak, just five months ago, SPACs were seen as a way to reverse the decline and get promising companies that could use capital to market–with more than 850 SPACs public or looking for an IPO, that certainly seemed to be the case. But investors have backed off from SPACs since April. Part of this has been bad deals. EV maker Canoo (GOEV) is an example, because it pitched one business model to investors and then switched it during the closing period. That left institutional investors who provided the extra capital to close deals (the PIPE funding) stuck holding an investment they couldn’t sell due to lock-up agreements. For that reason and others, hedge funds and mutual funds decided they didn’t need to be PIPE investors–they could just wait until the deal closed and buy it then. Similarly, retail investors got burned by buying on the immediate excitement SPAC merger announcements would bring then seeing the price deflate quickly back to prior levels. SPACs now as a whole, with a few exceptions, essentially trade around their IPO price regardless of deal status or management.
That presents opportunity for us.
As traders, SPACs can be approached two ways. One way is essentially arbitrage, similar to buying a closed-end fund or ETF at a discount to net asset value and harvesting the difference. SPACs seeking targets but which haven’t identified one are simply pools of money. Every SPAC by rule has to put the bulk of the capital raised at its IPO into trust, callable on demand by shareholders at any point through the vote to approve a proposed merger. Generally, today SPACs trade in line with their per-share trust value. There are modest, quick profits to be made buying SPACs that slip below their per-share trust value. For reasons probably having to do with speed and convenience (and some ignorance) people do sell SPAC shares at prices below their intrinsic, trust value.
How do you know what the per-share trust value is? Look in the latest quarterly filing. In the balance sheet, find the “cash and investments in trust account” line, subtract any taxes and divide by the outstanding shares listed in the same document. It’s a bit of work and quite possibly an inefficient use of time given the small margins to be captured. Nonetheless, we’ve had some success buying SPAC shares at as deep as a 10% discount, often when previously reported deals fall through and upset investors dump shares. One can then make an immediate request for the trust value of the shares–a process you have to do through your brokerage–or wait for the market to do the work for you and get shares back to their trust value. If you like the SPAC’s target and management, you can wait and see if they strike a deal you like, then decide to get the IPO capital back or stick with the deal.
But we’re interested in a bigger fish: quality companies that present good opportunities given the market’s current disdain for SPACs. That brings us to our recommendation this issue: selected Greentech SPACs with pending deals with the best green tech stocks.
We collected data of 851 SPACs, dropping those yet to price their IPO, leaving 573 now trading. Among those, we found 71 that are ESG-focused, mostly desiring a Greentech target with a minority seeking social and governance-inspired deals. Of those, 37 have announced mergers that have yet to close. We eliminated three SPACs because their target companies aren’t ESG by our judgment and dropped another because it’s China-based acquiring a Chinese company and therefore has too much country risk for us right now. Three we set aside to conduct more research and one closed its merger just before publication.
That leaves us with six of the best green tech stocks undergoing SPAC mergers which you can read about by subscribing today.
Did you participate in the surging SPAC market? What was your experience?