Whitney Tilson’s email to investors discussing his two thoughts on the bursting of the SPAC bubble; shorting SPACs; he threatened to burn his business partner alive. now he’s a billionaire; a skeptical stock analyst wins big by seeking out frauds.
Q2 2021 hedge fund letters, conferences and more
The Bursting Of The SPAC Bubble
1) Special purpose acquisition companies ("SPACs") have taken a beating in recent months.
One exchange-traded fund that tracks the sector, the Defiance Next Gen SPAC Derived Fund (SPAK), closed at an all-time low on Friday, down 37% from its mid-February peak.
Contributing to the malaise in the sector, two well-known SPACs, run by respected hedge fund managers, both announced bad news on Friday...
First, Bill Ackman's SPAC, Pershing Square Tontine Holdings (PSTH), announced this: Ackman Plans to Return Proceeds From $4 Billion SPAC.
And then Jason Mudrick's SPAC, Mudrick Capital Acquisition Corporation II (MUDS), announced this: Topps SPAC Merger Collapses After Loss of MLB Trading-Card Deal.
I have two thoughts about all this:
First, while the warrants got hammered – both PSTH-WT and MUDSW fell 65% on Friday – the stocks barely budged, down 1.3% and 2.8%, respectively, because they were already trading near the value of their cash in the bank.
This underscores one of the big advantages of buying SPAC stocks: as long as you don't overpay, your downside is limited by the pile of cash... and you get a free (or close to free) look at the best deal the sponsor is able to find.
But, as I discussed in my August 16 e-mail – in the context of this article, How Millennial Investors Lost Millions on Bill Ackman's SPAC – it's critical that investors not oversize positions, use leverage, or establish anything but tiny positions in options or warrants.
My second thought is that, when any bubble bursts, there are always plenty of opportunities amidst the carnage, as babies get thrown out with the bathwater.
While my colleague Enrique Abeyta's recommendations in his Empire SPAC Investor newsletter have gotten hit along with the rest of the sector, which has been painful for us and our subscribers, the last thing we're considering is throwing in the towel. Rather, we're starting to get that feeling that I call "trembling with greed." This sector isn't going away, and right now the stocks of some of the best SPACs are trading below cash...
Shorting SPACs
2) One way to mitigate risk when investing in a particular sector – especially a hot one – is to hedge your long exposure by shorting the most overvalued, overhyped stocks. That's why in the May issue of Empire SPAC Investor, Enrique recommended shorting three SPAC stocks, one of which, battery maker Romeo Power (NYSE:RMO), is down 37% (the other two are flat and up 2% versus up 8% for the S&P 500 Index).
Here's an excerpt from Enrique's write-up on Romeo Power:
The problem is that Romeo can't fully figure out its market niche. The company claims that its technology is superior because of "energy density," meaning it provides more battery power per pound of weight.
However, the agreements Romeo has signed so far have mainly been for... garbage trucks...
Romeo can't even get its accounting together. It has no revenue, no product, and no numbers. It really shouldn't be public.
This is the perfect example of the situations we look to short. Romeo's goal is to get its batteries into garbage trucks... But its stock will get there first.
I asked Enrique to share his latest thoughts on RMO, and he replied:
Things have gone from bad to worse at Romeo. The company's CEO resigned earlier this month and it reported terrible second-quarter earnings a week ago. Revenue was down year over year, missing analyst expectations by more than 50%, and losses more than quadrupled to $28.7 million. Avoid this stock at all costs!
My colleague Berna Barshay also highlighted two SPACs to avoid in her Empire Financial Daily (which you can sign up for here – it's free). On February 8, she heaped scorn on the SPAC that announced it was acquiring consumer DNA-testing company 23andMe (ME). She concluded:
Suffice to say, there are a whole lot of red flags here... Avoid shares of VG Acquisition, which will trade as 23andMe with the ticker ME after the merger is complete.
Since then, 23andMe shares have tumbled 44%.
I reached out to Berna for her latest thoughts on 23andMe, and here's what she had to say:
When 23andMe reported its first quarter as a public company earlier this month, it posted a loss of $42 million in the quarter, up 17% versus the same period last year, despite revenues growing 23%.
Higher revenues yet bigger losses make this company a posterchild for what I like to call "profitless prosperity." This is even more clear looking at its recent full-year guidance for $250 million to $260 million in sales and a loss of $210 million to $225 million. That's somewhere between a negative 80% and negative 90% net margin, with no clear plan for how to turn this business into a money maker.
Also, let's not forget that this is a company that did $441 million in revenue in 2019 – so revenues will be down more than 40% in a couple of years. Stay away!
And in her February 12 e-mail, Berna was bearish on Andina Acquisition Corporation's deal to merge with Stryve Foods (NASDAQ:SNAX), a company that makes air-dried meat snacks – essentially beef jerky. She wrote:
Nine times trailing revenues for a tiny beef jerky company bought by a company with the clock running down... but it has Channing Tatum... What could go wrong?
Since then, Stryve shares are down 49%.
Berna also sent me her current thoughts on Stryve:
Shortly after completing the SPAC merger, Stryve announced that it would add two new categories to its existing air-dried meat product line: bone broth powder and protein powder, the latter of which is already a quite crowded category.
When the company reported second-quarter earnings last week, it gave guidance for 2021 top-line growth of 82% to 100% – which is respectable, but a far cry from the 136% growth it guided to at the time of the merger announcement. This lower growth rate comes despite the addition of two product lines that weren't contemplated when the original guidance was given.
Stryve is still trading around 4 times 2021 estimated sales... It's cheaper, but nowhere near cheap enough to buy a company losing money with a decelerating top-line growth rate.
He Threatened to Burn His Business Partner Alive
3) Speaking of SPACs to avoid or short, the one taking Better.com public, Aurora Acquisition (NASDAQ:AURC), sure looks like a good candidate based on this article: He Threatened to Burn His Business Partner Alive. Now He's a Billionaire. Excerpt:
In fact, one of Better's key investors, Pine Brook Capital, is threatening to sue the company and Garg, according to a recent company filing, claiming there have been "fiduciary breaches in connection with Better's corporate governance." (Pine Brook, which is already suing over a dispute related to stock sales, declined to comment.)
Another prominent backer, Goldman Sachs (GS), recently sold much of its stake; the firm declined to comment on why.
A Skeptical Stock Analyst Wins Big by Seeking Out Frauds
4) Activist short sellers have done a tremendous job exposing hype and fraud in many sectors, including SPACs.
None have been more active – and more impactful – than Nate Anderson of Hindenburg Research, who's profiled in this New York Times article: A Skeptical Stock Analyst Wins Big by Seeking Out Frauds. Activist short sellers aren't always right – but they are very healthy for our markets, especially during times of unbridled speculation. Excerpt:
"He's become a real giant killer," said Frank Partnoy, a former derivatives trader who is now a professor of securities law at the University of California, Berkeley, School of Law. He "seems fearless, even when going after some of the biggest corporate targets."
Mr. Anderson has emerged as the newest face of a small club of investors called activist short sellers – a style of investing popularized by Carson Block of Muddy Waters and Andrew Left of Citron Research. Such investors are often reviled by companies for their pugilistic tactics. Ordinary investors hate them because their investments can suffer. Short sellers see themselves as financial detectives, sniffing out corporate wrongdoing or inflated stock prices. Some, like Mr. Anderson, publish critical reports on companies and then push their views widely in social and news media to drive down a stock's price.
Best regards,
Whitney
P.S. I welcome your feedback at [email protected].
