Lessons From the Carnage in SPACs

Matt PalumboApril 28, 2022

This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Thursday, April 28, 2022

SPACs are getting spanked this year, as risk-off sentiment spares virtually no asset class.

All told, sponsors have abandoned plans for at least 56 new SPACs in 2022 (seven last week alone). Meanwhile, regulators are gearing up to tighten rules for these IPO alternatives beleaguered by poor performance and outright fraud in many instances, further turning the screws on the industry.

Bottom line: Investors and sponsors alike are reeling and feeling the pinch. However, there are lessons here that investors can use to mitigate or prevent future losses.

Special purpose acquisition vehicles were relatively unused until the firehose of pandemic liquidity spurred Wall Street capital markets teams into action, forming hundreds of companies to raise billions of dollars of equity in these so-called blank-check offerings

There are still over 950 SPACs seeking to raise $239 billion from investors. Of this, $207 billion worth haven’t even found a target. Given the hostile market environment — and perhaps an even more hostile Securities and Exchange Commission (SEC) probing for fraud — it’s difficult to imagine most of these ever merging. That might be good news for future investors.

But if you’re going to take the plunge, read the prospectus and ignore the celebrity sponsors. Most of these don’t pass the smell test. That’s lesson one. All investors are responsible for their own due diligence, but many rarely conduct it.

In the case of SPACs, that can be difficult, as current SEC rules allow for more liberal projections about future growth than traditional IPOs. That’s likely changing, but won’t help the momentum chasers whose short-term trading punts have now become long-term “investments.”

Lesson two is risk management — THE name of the game in investing. Passive investors should learn the basics of rebalancing. Every stock picker needs a plan from the get-go, lest they become the ultimate bag-holders. This may be a protective stops, hedges, or simple dollar-cost averaging strategy. By the time a stock plummets 20% from an earnings miss or a general market meltdown, it’s too late.

Now let’s survey the damage in SPACs since the beginning of 2021 for a quick example. The below chart speaks volumes.

The benchmark Defiance NextGen SPAC IPO ETF (SPAK) is down 45% since the beginning of 2021, having closed at a record low on Monday. Of the nine featured SPACs also tracked above, only Lucid Motors (LCID) and Cerevel Therapeutics (CERE) are in the green — yet off 70% and 33%, respectively, from their all-time highs.

WeWork (WE) — the real estate company that famously abandoned its plans for a traditional IPO in 2019 — listed last October and is down 36% from 2021.

Fintech giant SoFi Technologies (SOFI) debuted to much fanfare last year, as it merged with the fifth iteration of Chamath Palihapitiya’s Social Capital Hedosophia Holdings company. It’s been cut in half — meaning investors need to hold out for a 100% rally to get back to even over this time frame.

It gets worse for Luminar Technologies (LAZR) and Virgin Galactic (SPCE) — each crashed more than 60%. Beachbody (BODY) got shellacked to the tune of 85%. And, the short list rounds out with used car dealer CarLotz (LOTZ) shedding a shocking 92% since 2021.

Investor lessons

Alright, enough rubbernecking of the carnage in the capital markets. (It hit my 401(k), too.) But there are things an investor can do to mitigate the damage.

Doing the math, if a stock is down 90%, it takes a 1,000% rally just to be made whole. Let that sink in. Without casting shade on the actual businesses conducted by the over 260 SPACs that have come to market since 2018, most will not recover investor losses, and many will fold. (Many IPOs will too, for that matter — it’s the cycle of business, Simba.)

Ahead of Berkshire Hathaway’s annual meeting in May, it’s worthwhile to remember the sage words of Warren Buffett: “Buy a stock the way you would buy a house. Understand and like it such that you’d be content to own it in the absence of any market.”

Today’s newsletter is by Jared Blikre, a reporter focused on the markets on Yahoo Finance. Follow him @SPYJared.

What to watch today

Economy

8:30 a.m. ET: GDP Annualized, quarter-over-quarter, Q1 advance (1.0% expected, 6.9% prior)
8:30 a.m. ET: Personal Consumption, quarter-over-quarter, Q1 advance (3.5% expected, 2.5% prior)
8:30 a.m. ET: GDP Price Index, quarter-over-quarter, Q1 advance (7.2% expected, 7.1% prior)
8:30 a.m. ET: Core PCE, quarter-over-quarter, Q1 advance (5.5% expected, 5.0% prior)
8:30 a.m. ET: Initial Jobless Claims, week ended April 23 (180,000 expected, 184,000 during prior week)
8:30 a.m. ET: Continuing Claims, week ended April 16 (1.400 million expected, 1.417 million during prior week)
10:00 a.m. ET: Kansas City Fed Manufacturing Index, April (35 expected, 37 during prior month)

Earnings

Pre-market

6:30 a.m. ET: Caterpillar (CAT) is expected to report adjusted earnings of $2.61 per share on revenue of $13.08 billion
7:00 a.m. ET: Altria (MO) is expected to report adjusted earnings of $1.09 per share on revenue of $4.87 billion
Twitter (TWTR) is expected to report adjusted earnings of $0.03 per share on revenue of $1.23 billion
Comcast (CMCSA) is expected to report adjusted earnings of $0.80 per share on revenue of $30.52 billion
Merck (MRK) is expected to report adjusted earnings of $1.83 per share on revenue of $14.58 billion
Northrop Grumman (NOC) is expected to report adjusted earnings of $5.96 per share on revenue of $8.89 billion
Domino’s Pizza (DPZ) is expected to report adjusted earnings of $3.06 per share on revenue of $1.03 billion
Keurig Dr. Pepper (KDP) is expected to report adjusted earnings of $0.33 per share on revenue of $3.01 billion

Post-market

Amazon (AMZN) is expected to report adjusted earnings of $8.40 per share on revenue of $116.43 billion
Apple (AAPL) is expected to report adjusted earnings of $1.42 per share on revenue of $93.98 billion
Intel (INTC) is expected to report adjusted earnings of $0.80 per share on revenue of $18.31 billion
PayPal (PYPL) is expected to report adjusted earnings of $0.88 per share on revenue of $6.40 billion
Robinhood (HOOD) is expected to report an adjusted loss of $0.36 per share on revenue of $352.93 million