Investing in Common Stock Vs. Warrants: SPAC Spotlight

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In the ongoing debate of investment decisions and where to allocate ones’ resources, I want to showcase the advantages and disadvantages of how mildly different portfolio allocations can make a significant difference in the return you will see on your investments…. I must preface the following content with a summary of the current analyst material that you will readily find at a mere mention of the acronym SPAC in any search engine. The flood of content is typically related to an individual company specifically and/or an article that seeks to gain page views for a myriad of reasons. Peeling back the veil, I will explain in short order what the two investment vehicles offer as a contrast to each other when comparing an investment in the common stock of a Special Purpose Acquisition Company (SPAC) to its publicly traded stock warrant. You will find through the subsequent material that the opinion expressed here is validated through the results as they relate to the retail investor seeking larger than average returns.

"A Special Purpose Acquisition Company (SPAC) is defined as a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company. Also known as “blank check companies,”

– Investopedia
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Some important things will be relevant whether it’s in the common shares or the stock warrants and that is the nature of the business involved and, in particular, the management which is driving this vehicle. SPAC’s by nature have no predefined business that currently operates and are formed with the express purpose of mergers, acquisition, or business combinations. As one can imagine, these entities can range from companies headquartered in the Cayman Islands, Shanghai, New York etc… Now that, in itself, should alert an experienced investor to the pitfalls of the SPAC speculation in general, that is after all what this particular investment strategy is. Speculation. It is a speculation that the management team involved can locate and secure a transaction that is beneficial to both parties and causes a large increase in perceived value due to the immediate access to capital that the SPAC entity offers. Until that deal is announced, the trade itself is based on the management of the SPAC and the value of the IPO which indicates what is available to make offers for that aforementioned transaction. (Additional Considerations are given for Expiration Date)

What does this mean for the retail investor or shorter-term trader? It means that if the SPAC you are interested in does not have the red flags that would discourage taking a position (e.g. “abcExampleSPAC IV” has never had success yet is on number 6…) Then this is handled like any other trade that thrives on event driven cycles. There are obvious indicators that should not be ignored just as they should not be with other investment strategies. The assumption that the retail investor knows this will be made through the rest of the article.

So, the common share versus the warrant is a conversation often had between individuals that are less experienced with the warrant transactions. Many of the recent authors you have read depict the SPAC bonanza we currently find ourselves in as a “hand over fist collection of money from the coffers” that you almost can’t be wrong. In at least a portion of that analysis they are not incorrect, but there are very few similarities other than the underlying security. If you need specific examples, they are found throughout CommonStockWarrants.com and for the purpose of this writing I will use one as an example for the sake of brevity. Sufficed to say it is rarely the decision to invest in the company that is incorrect but rather the method by which an investor can leverage both their capital and returns in a more substantive way.

** In FULL DISCLOSURE I owned the warrants (PIC.WS) during this cycle and have since exited **

Pivotal Investment Corp II

Pivotal Investment Corporation II operates as a blank check company. The Company formed for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization, and similar business combination with one and more businesses or entities.

PIC

  • Entry Price: $10.20
  • Current Price: $13.37
  • Time Since Entry: 16 Days

PIC.WS

  • Entry Price: $1.06
  • Current Price: $4.50
  • Time Since Entry: 16 Days

The example provided below covers the period entered September 04, 2020

To discuss the company in detail would detract from the specific argument that I am going to make here so it will be covered separately in an individual write-up as previously mentioned. (check back soon for link) and additional examples of similar trades can be found in this series as well (Trading your way to quick gains with a basket of warrants.)
 
Look at that chart and it should be obvious that the period being referred to is the parabolic movement on the announcement of a business combination with XL Fleet. This is the underlying purpose of the SPAC structure so it should come as no surprise that this is also the event driven moment we are trying to capture whether that is in the common share or the warrant. There are differences that make the two securities diverge however.
 
Entering the trade on September 4, 2020 at roughly $1.06 USD for X number of warrants and at the time of this writing the Market Open is showing $4.50 USD about 2 weeks later. Quite a few considerations can be made for a myriad of other aspects but we are only interested in the subject of this article,”Common Stock Vs. Stock Warrants.” The warrant shows an increase of roughly 325%
 
For contrast, entering the trade on the same date at $10.20 USD for X number of shares and also at the time of this writing shows an open for $13.37 USD. This represents an increase of roughly 31%
 
The contrast is rather staggering as can be evidenced when an equal investment in both securities is not an equal return. If you are interested in following an SPAC or adding them to your portfolio then you should be following CommonStockWarrants for the better play.
 
Jeff Baker
Analyst- Common Stock Warrants

Disclosure/Disclaimer Statement: CommonStockWarrants.com and Jeff Baker are not an investment advisor and any reference to specific securities does not constitute a recommendation thereof. Neither the information, nor the opinions expressed should be construed as a solicitation to buy any securities mentioned in this Service. Examples given are only intended to make investors aware of the potential rewards of investing in Warrants. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions involving stocks or Warrants.

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