SPACs are risky. What is the plan now? Part 2
Is there a SPAC investment strategy that can work today?
In 2020 when SPACs became all the rage, the strategy was “buy, buy, buy” and then sell half when they announced their target and the other half after de-SPAC => and double your money. Easy peasy. A lot of “experts” were created in 2020. Investors who thought they knew how to win. The thing is when a strategy works, especially so well, it can’t last long. And those that continued with this strategy and didn’t change, got hurt. I know, I lost money in plenty of pre-announcement SPACs from mid-February through mid-May.
The chart below shows the performance of the SPAC Index beginning July 1, 2020. By mid-February, the market cap weighted performance showed more than 80% appreciation. But since then, the index has moved to 0.78, or a 22% loss from the base.
Let’s look at a specific stock price chart of a recently de-SPACed company. Below is a chart of a XOS Trucks (XOS) that transitioned on August 19th. This price action is similar to many of the current companies going through the transition to their own ticker. The SPAC comes out at $10, there is a run-up in January and February, it still had a nice price increase post-announcement of the target, then drifted back to about $10 (+/- $0.30) by August, and drops significantly post de-SPAC to as low as $7.53 per share.
In this scenario, it doesn’t make much sense to hold onto the SPAC through the transition. How should an investor play this market? When is the right time to buy? Well, if any of us knew this answer, we could quit our day job. So I’m going to go back to my investment thesis to see if it provides clues to a strategy.
When you make an investment in companies and industries, it helps to have an investment thesis. This thesis is your world view of what industries will over-perform over the next 5-10 years (or whatever your investment timeframe is) and which companies are the best ones in those industries.
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My investment thesis: A) Many of the Clean Energy and Sustainability market segments will experience outsized grow rates in the 2020’s with increases of 20-40% compounded annual growth rate (CAGR). B) The SPAC market provides a way to invest in early stage, innovative, growth companies that we would not have had the opportunity to invest in previously (they would have raised money through venture capital series C or D raises). A+B) The combination of clean energy companies coming public through SPACs provides an opportunity for significantly above average returns by 2030 (note: also comes with above average risks too). In addition for me personally, I get more satisfaction and enjoyment investing in companies addressing climate change than I would by investing in an S&P 500 index fund or large growth companies (like Apple, Google, and Amazon).
Target returns: To track this strategy, I set up a new account in June and plan to build this portfolio to be fully invested by the end of 2021. Therefore, during the second half of the year, I am focused on getting the lowest entry point into my top 15-20 stocks that will make up this portfolio => all holdings will be de-SPACed clean energy companies. The return target is to grow the portfolio by 5x the original investment by 2030. This equals an annual return of just under 20% (19.6%). I will actively manage the holdings to cull losers, add to winners, and find new companies to bring into the fold over this timeframe.
Good Practice: If you are investing in stocks, you should create (and write down) your own investment thesis. For each holding in your portfolio, write down how it fits into, or supports, your thesis.
As of August 24th, 2021, there are 40 companies that qualify for the portfolio => de-SPACed clean energy companies. In addition, there are another 25 SPACs with target announcements that would qualify and will likely transition by the end of the year. I need to pick out 15-20 of these 65 (or the top ~25%).
The main market segments within clean energy and sustainability included in my qualifications are: Electric vehicles, EV charging, Batteries, Energy storage, Lidar, Green hydrogen, Renewables, and Agriculture technology. I would like to have representation from all segments in my portfolio, so I need to pick out the top one to three companies in each category. My preference is to buy companies that have proven traction, i.e. they have revenue (although there are a few pre-revenue speculative ones that are hard not to include like QuantumScape).
In August, I have focused on adding shares to recently de-SPACed tickers as these have fallen below $10. Therefore, I’ve been able to achieve a lower average cost of shares. Generally my process is to add 5-10% of full position with each buy. So I’m buying 10-20 times over time in order to build into the full position of each company. There is too big of a risk to buy your whole position on one day at one time, especially when you are in for the next five years.
Tip: Buy over several months and dollar cost average into the holding. Tip 2: Full position equals what you want to invest into each stock. For example, if you have $5,000 and want to own 5 stocks, the “full position” could be considered $1,000.
A good current example of accumulation is Microvast (MVST), a battery maker in the commercial vehicle market, has projected 2021 revenue of over $200 million, and strong partnerships. It de-SPACed on July 23rd and its price dropped significantly all the way down to as low as $7.83; today it is at $8.79. In the past month, I have made 18 purchases that created an average price of $9.17. This company traded as high as $25/share in February. I believe that this stock will be able to achieve the 5x portfolio target from here (~$45/share) within the next few years.
A few other names I’m watching or beginning to accumulate include (this is not an exhaustive list):
Of course when you are picking the top companies of each market, several of these have performed well and their price per share represents that. These companies listed below are trading over $20 and I have owned for sometime. Would consider buying more if I can lower my average cost. For QS, I sold all previous shares when it was in the $30’s and only begun to accumulate when it briefly went under $20. It is pre-revenue company, but lots of hype around its solid state technology.
So will this new strategy work? Only time will tell. But I like getting innovative, growth companies “on sale”. I’ll continue to follow their quarterly reports to ensure they are executing on their plans. Those that execute, stay in. Those that don’t will be released.
Next month I’d like to talk about the mentality of holding shares on the stock exchange (where you see the prices everyday) versus investments where the price doesn’t change daily (i.e. art, houses, VC firms). Until the end of the month update, be careful out there, but ensure you are in the game.
TL;DR. (too long; didn’t read) => Best strategy today in SPACs (IMO) for the long term investor is to dollar cost average into recently de-SPACed companies where you can build a low-cost position (<$10). But each holding must support your long term investment thesis.
This is for educational and entertainment purposes only. It should not be considered financial advice. See a financial advisor for investment advice.
Each month I provide a performance update on a clean energy SPAC portfolio created on 1/1/2021 on Public.com and compare it to benchmarks. In addition, there is usually one additional article on the topic of the month. If you would like to receive this newsletter to your email, please subscribe below. Or hit the share button to someone else whom you think may enjoy.