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Short sellers come for PSPCs.
Investors who bet against stocks target special purpose acquisition companies, one of Wall Street’s hottest growth areas. The dollar value of bearish bets against PSPC stocks more than tripled to about $ 2.7 billion, from $ 724 million at the start of the year, according to data from S3 Partners.
Some of the stocks attacked are owned by large PSPCs which have jumped in recent months, in part because they were backed by high-profile financiers. A blank check company created by venture capitalist Chamath Palihapitiya that plans to merge with lending start-up Social Finance Inc. is a popular target, with 19% of its outstanding shares sold short, 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 who is merging with electric vehicle start-up Lucid, more than doubled in March to around 5%.
Others bet against companies after their association with PSPCs. Muddy Waters Capital LLC announced last week that it is betting against XL Fleet Corp.
, a fleet electrification company that went public in December after merging with a SPAC. XL has since said that the Muddy Waters report, which alleged that XL had inflated its sales pipeline and made misleading claims about its technology, among other problems, had “many inaccuracies”.
XL’s share price fell on the day Muddy Waters released its report by around 13%, to $ 13.86, from its previous close on March 2. The shares closed at $ 12.79 on Friday.
Lordstown Motors actions Corp.
fell nearly 17% on Friday after Hindenburg Research released a report claiming that the electric truck’s startup misled investors about its orders and production. The company, which merged with a PSPC in October, said the report contained half-truths and lies. Short interest in Lordstown stocks fell from 3.4% to 5% the week before the report was released, according to data from S&P.
“PSPC is an area of focus,” said Carson Block of Muddy Waters. The seasoned short seller said that PSPCs constitute a large part of the universe of businesses that he considers both “appalling” and relatively free from technical challenges, such as high short interest, which can make betting against them difficult.
PSPCs are shell 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 new share issue market, becoming a status symbol for celebrities while increasing the value of acquisitions, like a betting company.
DraftKings Inc.,
in the tens of billions of dollars.
Hedge funds that buy early on in SPACs see them as a way to generate high returns without too much risk. Individual investors are drawn to the possibility of securing positions in newly opened companies that they would rarely be able to buy through traditional IPOs. The Securities and Exchange Commission issued a statement Wednesday warning that “it is never a good idea to invest in a PSPC just because someone celebrates or invests in it.”
A month-long equity rally has recently lost momentum amid the widespread liquidation of high-growth and technology companies. A PSPC 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.
“These are all momentum stocks, and a lot of people want to sell them,” said Matthew Tuttle, whose company Tuttle Tactical Management manages an exchange-traded fund that allows investors to own a portfolio of PSPC stocks. Mr Tuttle is preparing to launch an ETF that bets against the “de-SPAC” stocks of companies that have merged with a SPAC, such as electric truck maker Nikola Corp.
and manufacturer of bakery products Hostess Brands Inc.
—And a segregated fund that invests in stocks.
Private companies are flocking to Special Purpose Acquisition Companies, or SPACs, to bypass 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 the risk. Illustration: Zoë Soriano / WSJ
Post-merger companies are particularly attractive for short selling because they have a larger market capitalization, which makes it easier to borrow their stocks, and because early PSPC investors are eager to sell stocks to lock in profits. analysts and fund managers said.
Short sellers borrow stocks they think are overvalued and sell them immediately, hoping to buy back the stocks at a lower price when they need to be returned and pocket the difference. The strategy has proven to be dangerous in recent months when individual investors have organized on social media to push stocks like GameStop Corp. up, forcing short sellers to buy stocks and cap their losses, helping to do so. increase the prices.
Continued strong investor demand for SPACs could draw short sellers into a similar situation. Short-selling PSPCs can also be risky because their stocks have a natural floor of $ 10, the price at which they can be redeemed prior to a merger, and because they are subject to large price fluctuations, the analysts.
Yet the share of stocks sold short in PSPCs and their acquisitions is increasing.
A blank check company created by venture capitalist Chamath Palihapitiya that plans to merge with lending start-up Social Finance Inc. is a popular target.
Photo:
Brendan McDermid / Reuters
Some are betting against stocks they believe have risen too quickly, to unsustainable valuations. The award from the bioplastics company Danimer Scientific Inc.
nearly tripled to $ 64 in the first six weeks of the year after it was purchased by a PSPC. Short interest in Danimer stock climbed to 8.5%, from around 1% in January, and its share price traded to around $ 42, according to S&P data.
Others make bearish bets to protect against potential losses from the SPAC stocks they own.
Veteran short seller Eduardo Marques cited PSPCs and their increase in the number of US listed stocks as a short selling opportunity, according to a pitch for a stock picking hedge fund called Pertento that he plans to launch this year. The list of US state-owned companies narrowed from the mid-1990s, but this trend has recently reversed, in part because of PSPCs.
Their popularity has helped spark new deals on Wall Street. Goldman Sachs Group Inc.
This year began offering clients similar short-term stock baskets, promoting them as a way to hedge exposure to PSPC, people who saw the offer said. Customers typically customize the baskets offered by Goldman, which are thematic and industry-focused, such as bitcoin and electric vehicles.
Kerrisdale Capital founder Sahm Adrangi began bypassing post-merger SPAC companies earlier than most, with a public bet in November against the stock of frozen food maker Tattooed Chef Inc.,
which is still trading above its price at that time. But the stock fell about 13% during the recent market collapse.
“We’ve seen these stocks increase a lot and now that people are reducing the risk, these bird’s-eye PSPCs are coming back down to earth,” Adrangi said.
—Amrith Ramkumar and Mike DeStefano contributed to this article.
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Write to Matt Wirz at [email protected] and Juliet Chung at [email protected]
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