Opinion: How to Find the Most Promising SPACs and Avoid Hidden Dangers

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Big investor Charlie Munger believes the world would be better off without SPACs, saying this week that “this kind of crazy speculation” is a sign of an “irritating bubble.”

But in the right hands, they offer an easier path to market than the traditional IPO route for strong companies. They can be good investments. The key is that you must know how to separate the wheat from the chaff. Here’s a guide on what to look for in SPACs, or Special Purpose Acquisition companies, which are known as blank check companies that go public with the intention of merging real companies into them. mixture. SPAC EOS Energy Enterprises Inc.’s EOSE, -12.54% almost doubled in the month after I mentioned it in my stock letter, Review Stocks (link is in bio below) on Dec 10, and still it is around 44%. I liked it at the time due to Bryant Riley’s purchase of B. Riley Financial Inc. RILY, + 1.54%, an insider that I like to follow for my stock chart. EOS Energy is probably more of a brake now, but here’s a new SPAC that looks attractive. In biotech, I always like to take a close look at what Perceptive Advisors is doing, because like Riley, they have a good track record. Perceptive is sponsoring a new biotech SPAC called ARYA Sciences Acquisition IV ARYD, its fourth. I don’t know what they will do with it. But given its track record, chances are good that it will pay off for investors. It is also a bullish sign that this SPAC has top-tier investment banks handling the initial public offering (IPO), in Goldman Sachs Group Inc. GS, -0.87% and Jefferies Financial Group Inc. JEF, -2.89 %. SPAC Tactic No. 2: Look for SPAC sponsors who have a good track record. This is a variation on the previous tactic, but here you focus on a specific track record only on SPACs. One that stands out is FS Development Corp. II FSII, -1.84%, led by health investors in Foresite Capital. Its former healthcare sector SPAC Gemini Therapeutics Inc. GMTX, + 1.97% has risen nearly 50% in three months. Gemini is developing a potential treatment for age-related macular degeneration (AMD). Also consider Alpha Healthcare Acquisition Corp. AHAC, -9.53%, led by Rajiv Shukla. Its former biotech SPAC, DermTech Inc. DMTK, -6.03%, recently increased 640% since its launch in 2019. Shukla’s Alpha Healthcare is merging with Humacyte, which develops bioengineered human tissues and organs that may not trigger rejection of the bodies. of the recipients. Its first products can be used in cardiac bypass surgery, pediatric cardiac surgery and type 1 diabetes. AHAC surpassed $ 14 in February, but is now down close to $ 12. Alpha Healthcare will soon be trading under the ticker symbol HUMA. That Perceptive Advisors SPAC ARYA Sciences Acquisition IV that I mentioned earlier also fits here. Perceptive’s track record at SPAC? His Arya Sciences Acquisition Corp. III ARYA, -7.11% is up 60% to $ 16 after trading in the $ 10- $ 11 range during the second half of last year. It is merging with a company called Nautilus that is developing a platform that can better analyze proteins in the body. This should help researchers to better understand diseases and possible therapies for them. Arya Sciences Acquisition Corp III will change its ticker to NAUT.SPAC’s # 3 tactic: favor SPACs sponsored 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 of Stanford University and New York University School of Law define “quality” SPACs as those sponsored by investors who manage a large amount of money. His cut is $ 1 billion, but any sizeable investment store fits the bill. The assumption is that if the backers have attracted a lot of money, they probably have a good investment record and a respectable level of investment experience. An example here is Pershing Square Tontine Holdings Ltd. PSTH, -1.67%, created by Bill Ackman at Pershing Square, a huge mutual fund that has made many good decisions over the years. Another is 23andMe that is made public through VG Acquisition Corp. VGAC, -4.46%. It is being established by Richard Branson of the Virgin Group. Tactic SPAC n. 4: Favor SPACs managed by former CEOs or senior executives of successful companies. The Stanford and NYU SPAC experts mentioned above also define “quality” SPACs as those led by former CEOs or senior executives of large companies. A good example here is the telecommunications and technology SPAC Colicity Inc. COLIU, -0.76%. Colicity is led by Craig McCaw of the telecommunications companies McCaw Cellular Communications, Nextel Communications and Clearwire. Colicity also scores well for the sponsor’s track record tactic, as another McCaw telecom and technology SPAC, Holicity Inc. HOL, -8.43%, has risen more than 60% from the $ 10 range in which it was negotiated during November-January. Another ticker here is Social Capital Hedosophia Holdings Corp. IV IPOD, -5.09%, created by Chamath Palihapitiya, former top executive at Facebook Inc. FB, -3.64%. SPAC Tactic No. 5: Dodge the avalanche of collateral dilutions. As I mentioned in my column on hidden risks in SPACs, a major problem with SPACs is that initial investors, such as hedge funds and Wall Street insiders, can get a guarantee for every share they buy in the IPO. That creates a big dilution if the stock does well. Warrants are a right to buy a share at a preset price, generally $ 11.50 for SPACs that are made public at $ 10. When people exercise warrants, new shares are created, which means a lot of dilution for other shareholders. The simplest way to avoid this is to avoid SPACs that offer a 1: 1 guarantee for each share. Not only does it avoid dilution, but to me, using little or no collateral is a bullish reversal signal. . It suggests that SPAC sponsors have a decent reputation as they didn’t have to go out of their way to attract investors by offering all those free guarantees. An example here is the SPAC telecommunications and technology colicity mentioned above. It offered one-fifth of a collateral executable at $ 11.50 when it launched its initial public offering this week, instead of a guarantee per share. Another called FinTech Acquisition VI, which was filed Wednesday, offers a quarter of an executable order at $ 11.50. (It will be traded with the ticker symbol FTVIU). Better yet, choose SPACs that do not offer guarantees. Two examples, already mentioned above because they checked the boxes for other tactics, are FS Development Corp II from Foresite Capital and SPAC ARYA Sciences Acquisition IV from Perceptive Advisors. Michael Brush is a MarketWatch columnist. At the time of publication, he owned EOSE and RILY. Brush has suggested EOSE RILY GS JEF FB in their stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.