SPAC short sellers arrive.
Investors betting on stocks are targeting special-purpose acquisition companies, one of Wall Street’s hottest growth areas. According to data from S3 Partners, the dollar value of bearish bets against SPAC shares has tripled to about $ 2.7 billion, from $ 724 million at the beginning of the year.
Some of the shares attacked belong to large SPACs that increased in recent months, in part because they were backed by high-profile financiers. A blank check company set up by venture capitalist Chamath Palihapitiya that plans to merge with Social Finance Inc. loan start-up. is a popular target, with 19% of its shares sold in the short term, according to data from S&P Global Market Intelligence. The short interest in Churchill Capital Corp. IV,
a SPAC created by former investment banker Michael Klein that is merging with the start of Lucid electric vehicles, more than double in March to 5%.
Others are betting on companies after merging with SPAC. Muddy Waters Capital LLC announced last week that it was betting on XL Fleet Corp.
, a fleet electrification company that went public in December after merging with a SPAC. XL has said the Muddy Waters report, which alleged XL was inflating the sales pipeline and making misleading claims about its technology, among other issues, had “numerous inaccuracies”.
XL’s share price fell on the day Muddy Waters released its report by about 13%, to $ 13.86, since its previous close on March 2. Shares closed Friday at $ 12.79.
Shares of Lordstown Motors Corp.
it fell nearly 17% on Friday after Hindenburg Research released a report saying the start-up of electric trucks had misled investors in its orders and production. The company, which merged with a SPAC in October, said the report contained half-truths and lies. Short-term interest on Lordstown shares rose to 5% from 3.4% the week before the report was released, according to S&P data.
“SPACs are an area of focus,” Carson Block of Muddy Waters said. The veteran short film salesman said that SPACs largely constitute the universe of companies he considers as “abysmal” as they are relatively free of technical challenges, such as a short interest, which can make it difficult to bet against them.
SPACs are share capital companies that raise capital by issuing shares for the sole purpose of buying or merging with a private company to make them public. They dominate the market for new securities issues, becoming a status symbol for celebrities as they increase the value of acquisitions, such as the betting company.
DraftKings Inc.,
in tens of billions of dollars.
Hedge funds that buy early SPACs see them as a way to get high returns without too much risk. Individual investors are attracted by the opportunity to obtain positions in start-up public companies that they could rarely acquire through traditional IPOs. The Securities and Exchange Commission issued a statement on Wednesday warning that “it’s never a good idea to invest in a SPAC just for someone famous to sponsor or invest in.”
A month-long concentration of shares lost strength recently amid a wide sell-off of technology and high-growth companies. An SPAC stock index operated by Indxx fell about 17% from mid-February to March 10, while the Nasdaq Composite Index fell about 7.3% over the same period.
“All of these are impetus actions and a lot of people want to reduce them,” said Matthew Tuttle, the Tuttle Tactical Management company that manages a traded fund that allows investors to maintain a portfolio of SPAC shares. Tuttle is preparing to launch an ETF that bets on the “de-SPAC” shares of companies that have merged with a SPAC, such as electric truck maker Nikola Corp.
and Hostess Brands Bakery Manufacturer Inc.
—And an independent fund that invests in shares.
Private companies are flooding special-purpose acquisition companies, or SPACs, to avoid the traditional IPO process and get a public listing. WSJ explains why some critics say investing in these so-called blank check companies is not worth it. Illustration: Zoë Soriano / WSJ
Post-merger companies are particularly attractive for short, as they have higher market capitalizations, which makes their shares easier to borrow and because early investors in SPACs are looking to sell shares for profit, as they go. say analysts and fund managers.
Short sellers borrow shares that they believe are overvalued and sell them immediately, hoping to repurchase the shares at a lower price when they need to return them and wrap up the difference. The strategy proved dangerous in recent months when individual investors organized on social media to drive stocks like GameStop Corp., forcing short-term sellers to buy stocks and limit their losses, which helped increase prices.
The continued strong demand from investors for SPAC could trap short-term sellers under similar pressure. SPACs in short film can also be risky because their shares have a $ 10 natural floor, the price at which they can be exchanged before the merger, and because they are prone to sharp price changes, analysts said.
However, the share of shares sold short in SPAC and its acquisitions is increasing.
A blank check company set up by venture capitalist Chamath Palihapitiya that plans to merge with Social Finance Inc. loan start-up. it is a popular goal.
Photo:
Brendan McDermid / Reuters
Some are betting on stocks that, according to them, are growing too fast, even to unsustainable valuations. The price of bioplastics company Danimer Scientific Inc.
it nearly tripled to $ 64 in the first six weeks of the year after the SPAC bought it. Short interest in Danimer shares has risen to 8.5% from 1% in January, and its share price has been trading at about $ 42, according to S&P data.
Others make bearish bets to protect themselves from possible losses from their SPAC shares.
Veteran short-selling Eduardo Marques cited SPACs and their increase in the number of shares listed in the United States as a short-term selling opportunity, according to a launch of a fundraising hedge fund called Pertento that plans to launch this year. The list of U.S. public companies had shrunk since the mid-1990s, but this trend has been reversed recently, in part because of SPACs.
Its popularity has helped spark new Wall Street deals. Goldman Sachs Group Inc.
this year began to offer customers baskets of stocks similar to short, which presented them as a way to cover the exhibition at SPAC, according to people who have seen the offer. Customers typically customize Goldman-themed, industry-focused baskets, such as bitcoins and electric vehicles.
Kerrisdale Capital founder Sahm Adrangi began shortening post-merger SPAC companies before the majority, with a public bid in November against shares of frozen food maker Tattooed Chef Inc.,
which is still trading above its price at that time. But stocks have fallen about 13% during the recent market crash.
“We saw that these stocks were increasing a lot and now that people are taking risks, these high-flying SPACs are coming down to earth,” Adrangi said.
—Amrith Ramkumar and Mike DeStefano contributed to this article.
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