GameStop Day merchants are moving to SPACs

Now, stocks of companies with blank checks almost always go up. The last 140 SPACs to go public registered gains or ended stable on their first day of trading, according to an analysis by the Dow Jones Market Date of trading in companies with blank checks until Thursday. One hundred and seventeen in a row rose in its first week. Gains tend to continue, generating higher returns on average in a few months.

The gains in companies that do not yet have underlying businesses underscore the wave of speculation in today’s markets. The merger with a SPAC has become a popular way for startups in busy sectors to go public and take advantage of investors’ enthusiasm for futuristic themes.

But lately, day traders are even putting money into SPACs before revealing the company they are buying. At this stage, they are pools of money, so investors are betting that the company will eventually conclude an attractive deal.

Despite the risks, many are embracing commerce, highlighting how online investment platforms and social media groups now send individuals en masse to new corners of the market, including shares in unprofitable companies like GameStop and AMC Entertainment Holdings Inc.

AMC 53.65%

This trend is also happening in everything from silver mining stocks to SPACs, which were relatively rare before last year, but have suddenly become ubiquitous in the financial sector.

“I would have a serious case of FOMO if I weren’t in SPACs,” said Marco Prieto, a 23-year-old realtor who lives in Tucson, Arizona, referring to the fear of losing what is driving many individuals to put money on us. markets.

He has a portfolio of around $ 50,000 and about 60% of his holdings are tied to blank check companies. Some of its positions are initial in front firms, such as Social Capital Hedosophia Holdings Corp. SAW,

while others are based on rumors linked to possible deals by companies like Churchill Capital Corp. IV.

The company’s shares have more than doubled since Bloomberg News reported on Jan. 11 that it is in talks to combine with electric car company Lucid Motors Inc. The deal was so frantic that SPAC issued a statement a week later saying it I wouldn’t. t comment on the report and that it is always evaluating a range of possible deals. The stock has still spun in the days since.

Investors who bet on SPACs even before such reports are extraordinary because the underlying value of a blank check firm before seeking a deal is the amount of money it raises for a public listing. This amount is usually set at $ 10 per share. Still, it has become common for investors to buy at higher prices, such as $ 11 or $ 12, to support renowned SPAC founders, such as venture capitalist Chamath Palihapitiya and former Citigroup Inc. negotiator Michael Klein .

In another sign, blank check companies are now frequently traded by individuals, several SPACs and companies that merged with them recently joined GameStop and AMC on a list of shares that had position limits at Robinhood Markets Inc., a popular broker for day traders. The restricted ones included Mr. Klein’s Churchill Capital IV and some Mr. Palihapitiya SPACs at Capital Social Hedosophia SPCE 2.74%

franchise.

The flood of money that is coming in is a concern for skeptics who fear that ordinary investors will not understand the dangers of trade. Even recent losses in some major companies, such as electric truck startup Nikola Corp.

NKLA -0.39%

and healthcare company MultiPlan Inc., which merged with blank check companies, are not stopping investors because of gains in other SPACs.

“It’s a huge amount of speculation,” said Matt Simpson, managing partner at Wealthspring Capital and an investor at SPAC. Your company invests when SPACs go public or soon after, and then takes advantage when stocks go up and usually sells before a deal is completed. He announced an expected 6% return on strategy for customers, but last year it was 20%.

Ninety-one SPACs have raised $ 25 billion so far this year, putting the market on track to break last year’s record of more than $ 80 billion, according to data provider SPAC Research.

Rapid stock gains can result in huge rewards for its founders and early investors in blank check firms like Simpson. These first investors always have the right to withdraw their money before the transaction is completed. Operators who enter later do not have the same privileges, but that is not a deterrent.

“If you don’t take any chances, there will be no chance,” said Chris Copeland, a 36-year-old from upstate New York who started day trading on the Robinhood platform with his girlfriend last month. Approximately three-quarters of its portfolio is linked to SPACs, such as GS Acquisition Holdings Corp. II.

Turnover at many popular blank check firms has recently increased, an indication of increased investor activity. This trend is drawing the attention of some SPAC founders.

“It worries me,” said veteran SPAC investor Bill Foley. Turnover increased in one of the SPACs founded by the owner of the hockey team Vegas Golden Knights, especially since it announced a $ 7.3 billion deal to acquire the Blackstone Group Inc.

BX 0.21%

-The supported benefits provider Alight Solutions published last week.

One reason traders are entering blank check firms when they are just cash reserves is that the time it takes for a SPAC to reveal a deal has decreased. Blank check firms typically give themselves two years to acquire a private company, but many today need only a few months.

Nor did it take long for investor speculation about the acquisition of a blank check firm to increase, especially since SPACs can indicate the sector in which they hope to close a deal.

The excitement can be sparked by an SPAC pioneer like Palihapitiya, who sometimes suggests to his more than 1.2 million Twitter followers when the activity is coming. Former Facebook Inc. executive took over space tourism company Virgin Galactic Holdings Inc.

public in 2019 and last month reached an agreement with Social Finance Inc.

Even if he invests in several blank check firms other than his own – usually when SPACs need to raise more money to close deals – the shares of his own companies may rise after these tweets. An example came on January 21, when one of his blank check companies increased by about 4% after Palihapitiya started a tweet saying “I am finalizing an investment in ‘???.’“

Since then, SPAC has returned those earnings after no news of an acquisition was released and it was revealed that Mr. Palihapitiya’s investments were in companies unrelated to his. He declined to comment.

Palihapitiya also threw himself into the frenzy of activity around GameStop trading, publicizing an options trading last week and making profits from it.

Reports on possible mergers, such as those surrounding Churchill Capital IV SPAC and a possible combination with Lucid Motors, also quickly attract hordes of buyers. This blank check firm now belongs to many individuals, including Mr. Prieto, Copeland and Jack Oundjian, a 40-year-old man who lives in Montreal.

“I am very excited to have the chance to participate in what could be future unicorn companies,” or startups valued at $ 1 billion or more, said Oundjian. He said he sees SPACs as long-term investments, rather than quick transactions, and holdings linked to the sector represent about 30% of his portfolio of around $ 1.2 million.

Write to Amrith Ramkumar at [email protected]