Short sellers come for SPACs.
Investors betting against stocks are turning to special purpose acquisition companies, one of the hottest growth areas on Wall Street. According to data from S3 Partners, the dollar value of bearish bets against shares of SPACs has more than tripled from $ 724 million at the start of the year to about $ 2.7 billion.
Some of the stocks attacked are owned by major SPACs which have soared in recent months, in part because they were backed by leading funders. A blank check company founded by venture capitalist Chamath Palihapitiya that plans to merge with the credit startup 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 that merges with electric vehicle startup Lucid, more than doubled to about 5% in March.
Others bet against companies after pairing them with SPACs. Muddy Waters Capital LLC announced last week that it was betting against XL Fleet Corp.
, a fleet electrification company that went public in December following its merger with a SPAC. XL has since said that the Muddy Waters report, claiming that XL inflated its sales pipeline and made misleading claims about its technology, among other things, contained “numerous inaccuracies.”
XL’s stock price fell about 13% the day Muddy Waters released its report, to $ 13.86, from its previous close on March 2. Shares closed at $ 12.79 on Friday.
Shares of Lordstown Motors Corp.
fell nearly 17% on Friday after Hindenburg Research released a report saying electric truck startups had misled investors about its orders and production. The company, which merged with an SPAC in October, said the report contained half-truths and lies. According to data from S&P, short-term interest rates in Lordstown shares have risen from 3.4% in the week leading up to the report’s release to 5%.
“SPACs are an area of focus,” said Carson Block of Muddy Waters. The veteran short-seller said that SPACs are largely the universe of companies he sees as both “hopeless” and relatively free of technical challenges, such as high short-term interest rates, that can make betting against them difficult.
SPACs are empty firms that raise capital by issuing shares for the sole purpose of buying or merging with a private company to disclose it. They dominate the market for new equity issues and become a celebrity status symbol as they pump the value of acquisitions like a gambling company
DraftKings Inc.,
in the tens of billions of dollars.
Hedge funds that buy up SPACs early on see them as a way to get high returns without much risk. Individual investors are drawn to the opportunity to gain positions in new publicly traded companies that they would rarely be able to buy through traditional IPOs. The Securities and Exchange Commission issued a statement on Wednesday warn that “it is never a good idea to invest in a SPAC just because someone known is sponsoring or investing in it.”
A month-long rally in equities recently lost momentum due to a wide sell-off in technology and high-growth companies. An index of SPAC stocks managed 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 short them,” said Matthew Tuttle, whose firm Tuttle Tactical Management operates an exchange-traded fund that allows investors to hold a portfolio of SPAC stocks. Mr. Tuttle is preparing to launch an ETF that will bet against “de-SPAC” shares of companies that have merged with an SPAC, such as electric truck manufacturer Nikola. Corp.
and confectioner Hostess Brands Inc.
– and a separate fund that invests in the shares.
Private companies are transitioning to special 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 checks is not worth the risk. Illustration: Zoë Soriano / WSJ
Post-merger companies are particularly attractive to short because they have larger market caps, making their shares easier to borrow, and because early investors in the SPACs are eager to sell shares to capture profits, analysts and fund managers said.
Short sellers borrow stocks that they believe are overvalued and sell them immediately, hoping to buy the stock back at a lower price when due back, and pocket the difference. The strategy proved dangerous in recent months as individual investors organized on social media to buy stocks like GameStop Corp. upward, forcing short sellers to buy stocks and cut their losses, driving prices even higher.
Continued strong investor demand for SPACs could put short sellers in a similar tightness. Shorting in SPACs can also be risky because their stocks have a natural bottom of $ 10, the price at which they can be redeemed before a merger, and because they are sensitive to sharp price movements, analysts said.
Still, the proportion of stocks sold short in SPACs and their acquisitions is on the rise.
A blank check company founded by venture capitalist Chamath Palihapitiya that plans to merge with the credit startup Social Finance Inc. is a popular target.
Photo:
Brendan McDermid / Reuters
Some are betting against stocks that they believe have risen too quickly to unsustainable valuations. The prize from bioplastics company Danimer Scientific Inc.
nearly tripled to $ 64 in the first six weeks of the year after being bought by a SPAC. The short stake in Danimer stock is up from about 1% in January to 8.5% and the stock price is down to about $ 42, according to data from S&P.
Others make bearish bets to hedge against potential losses in SPAC stocks they own.
Veteran short-seller Eduardo Marques cited SPACs and their increase in US-listed stocks as a short-selling opportunity, according to a pitch for a stock-selective hedge fund called Pertento that he plans to launch this year. The US list of state-owned companies had shrunk from the mid-1990s, but that trend has recently reversed, in part due to SPACs.
Their popularity has helped spark new Wall Street offerings. Goldman Sachs Group Inc.
This year, clients have started offering fixed baskets of similar stocks to short, pitching them as a way to hedge exposure to SPAC, people who have seen the offering said. Customers typically customize the baskets Goldman offers, which are thematic and industry-focused, such as on bitcoin and electric vehicles.
Kerrisdale Capital founder Sahm Adrangi started shorting out post-marger SPAC companies earlier than most companies, with a November public bet against frozen food maker Tattooed Chef’s stock Inc.,
which at that time is still trading above its price. But the stock has fallen about 13% during the recent market decline.
“We saw these stocks go up a lot and now that humans are reducing the risk, these high-flying SPACs are coming to Earth,” said Mr Adrangi.
—Amrith Ramkumar and Mike DeStefano contributed to this article.
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