Over the past month, we’ve seen plenty of volatility in crypto and the broader markets.
The crypto market lost about $1 trillion in market cap in a week. The FAANGs sold off as much as 8% from April to May. And IPOs have fallen 6% this year.
Arguably, we can tie a great deal of this volatility to speculative trading by retail investors. Think of the r/WallStreetBets movement. Cryptos, hypergrowth tech stocks, and IPOs have all been very popular with retail traders.
There’s a common thread… So it’s not surprising these markets have shown some correlation. And they’ve all cooled off a bit.
Take IPOs. An initial public offering (IPO) is when a private company lists its stock on a public exchange.
Historically, IPOs tend to pop shortly after they go public… that’s when retail investors pile in hoping to get ahead of any rise in price.
Although, we’ve seen an interim decline, the IPO market has been strong in terms of supply over the last few years.
To date, we’ve seen 487 companies go public this year… that’s close to last year’s record-breaking 494… and we have six months to go in 2021.
Longtime readers know that Daily editor Teeka Tiwari has been pounding the table on the lucrative opportunities in IPOs since January 2020.
And his predictions have been proven right…
The Renaissance IPO ETF (IPO) is a proxy for the IPO market. While it’s cooled off some this year, it’s still up 103% over the last year-and-a-half. That’s more than 3x the S&P 500’s return of 33% over the same period.
Now, beating the market by that much is hard to do. But there’s a way to get even more bang for your buck from this megawave of IPOs coming to market… I’m talking 10x, 20x, even 50x your money.
And best of all, recent market weakness is giving us a chance to buy this idea at a significant discount.
“$1.4 Billion of Free Money”
IPOs are one way for a company to go public. But “SPACs” are another alternative.
SPAC stands for special purpose acquisition company. It’s also called a “blank-check company” or a “shell company.”
Some private companies prefer the SPAC route because it’s less expensive… has fewer regulations… and lists more quickly than traditional IPOs.
SPACs raise billions of dollars to buy private companies with explosive potential upside. Think of popular names like SoFi, Tattooed Chef, and ChargePoint. By buying the private company, the SPAC effectively takes it public.
This year, 329 of the 482 public listings have been SPACs. And right now, there are 573 SPACs outstanding in the U.S. with 149 of them having announced deals – or private companies they’re bringing public.
And the other 424 are searching for a deal. (SPACs typically have two years to identify and complete a deal.)
Now, as I mentioned, the SPAC market has come under some selling pressure recently.
But you should view this as a buying opportunity. Sentiment has gone from red hot to ice cold. And SPACs are now trading at discounts.
I recently checked in with my colleague, Julian Klymochko – CEO and CIO of Accelerate Financial Technologies. He launched the first exchange-traded fund (ETF) in North America with a sizable dedication to SPACs. It’s called the Accelerate Arbitrage Fund (ARB.TO), listed on the Toronto Stock Exchange.
So he knows a thing or two about SPACs. Here’s what he said about today’s market:
Approximately 80% of SPACs are trading at a discount to their cash value. Investors can redeem a SPAC for its cash value if they don’t like a deal. The aggregate difference between SPAC cash held in trust and the SPAC market prices represents roughly $1.4 billion of “free money” for those investors willing to pick it up.
In other words… now’s the time to buy quality SPACs. Especially since the SPAC market is trading at a discount.
In mid-February, SPAC valuations peaked at a 27% premium to the underlying net asset value (NAV). In other words, the average SPAC, which had a cash value of $10, was trading at $12.70. Hence, there was extreme speculation and a market frenzy in SPACs.
Today, that premium has been erased… In fact, there’s a slight discount now. The median SPAC is trading at $9.85 – or a 1.5% discount – to its $10 NAV.
Plus, there’s additional upside potential when you’re able to buy at $9.85 versus $12.70 three months ago.
When a massive trend like this sees a temporary selloff, you should view it as a gift.
If SPACs just go back to the average premiums they had in February, that’s roughly a 30% gain. That’s the power of buying into a long-term trend on short-term weakness.
And even during the recent downturn, some SPACs have landed big returns. Here are a couple of the best-performing SPACs in 2021:
- Social Capital Hedosophia V units are up 120% since its IPO.
- Mudrick Capital Acquisition II units are up 50% since its IPO.
- Churchill Capital Corp IV units are 120% since its IPO.
While those gains are nothing to sneer at, they’re just a fraction of the potential in the pre-IPO market…
A Simple Way to Get Exposure to SPACs
Now, if you want to play this trend, consider a small stake in the Accelerate Arbitrage Fund (ARB.TO). Its portfolio is 85% SPACs.
ARB trades on Canadian exchanges. But if you don’t have access to the Canadian markets, consider the Defiance Next Gen SPAC Derived ETF (SPAK). This ETF invests 40% of its portfolio in newly listed SPACs and 60% in IPOs derived from SPACs.
To be clear, SPACs come with some risks. For example, investor appetite for SPACs can wane… and they’re subject to the whims of the market just like any stock.
So using a fund – or investing in multiple, individual SPACs – will increase diversification and lower your risk. And always remember to do your homework before investing in any idea.
Analyst, Palm Beach Daily