Hyliion Holdings (NYSE:HYLN) lost 18% of its value on Nov. 30 on the news it was forcing the early redemption of its 12.5 million warrants outstanding. If you own Hyliion stock, you’re likely confused by the move.
Here’s why you shouldn’t be.
Forget the Hyliion Stock Dilution
InvestorPlace’s Sarah Smith has done a good job trying to highlight the pros and cons of the hybrid and electric powertrain company’s decision to push for the early redemption of its outstanding warrants. You can read that here.
If you’re one of the original SPAC shareholders who bought into the Tortoise Acquisition Corp. offering in March 2019, and you’re still holding, you’re currently sitting on a 119% return over the past 21 months based on a current share price of $18.47 and a warrant price of $6.87.
As Sarah said, a single unit in Tortoise cost $10, with the buyer getting one common share of Hyliion stock and half of a warrant to buy a second share for $11.50 anytime over the next five years.
However, because HYLN was able to stay above $18 for 20 out of 30 trading days leading up to Nov. 25 (three trading days before redemption notice), it’s able to redeem any, and all of the 12.5 million warrants left unexercised after 5 p.m. on Dec. 30.
So, unless you’re interested in taking a bath by getting a penny for your warrant, you will most certainly exercise your right to buy a second share at $11.50. The result is that your 119% return falls to 76% based on an outlay of $31.50 (two units at $10 each + $11.50).
Of course, this assumes that the share price remains around $18. You start losing money at $10.50 a share.
Based on the assumption that all 12.5 million warrants will be exercised, the company will receive $144 million in proceeds. At the same time, approximately 6.7 million private placements would remain unexercised, according to the most recent information from its Nov. 27 prospectus.
As for shares outstanding, they would increase by 8% to 166.4 million from 153.9 million on Oct. 1.
Is 8% really worth getting your shorts in a knot?
Buy More in the Mid-Teens
I’ve only written about Hyliion once before, and that was in early November. By no means am I an expert on the company. However, I recommended that speculative investors wait until it’s trading in the mid-teens before taking the plunge.
“What I do know is that the smarter play for most investors is to buy Tesla or GM rather than risking your hard-earned capital on Hyliion or some of the other money losers,” I wrote on Nov. 9.
“And if you’re a speculative investor, knock yourself out.”
It’s fallen almost $5 or 20% since then. It’s hard to know if it’s bottomed since the fallout from the early redemption of its warrants. Somehow, I doubt it.
However, I recently read an article from October in TruckNews.com that makes me think Hyliion is continuing to get real-world interest from commercial truckers on both sides of the Canadian-U.S. border for its compressed natural gas (CNG) hybrid solution and its Hypertruck ERX electric solution.
“Initially, C.A.T. intends to equip five trucks with the Hyliion hybrid system to evaluate its performance,” stated TruckNews.com contributor Steve Bouchard while discussing a Quebec company’s interest.
“‘If things are going well, the goal would be to equip the 100 or so trucks in the fleet. It all depends on the results that the product will give,’” said C.A.T. Transport chief executive officer Daniel Goyette.
That means it needs cash, not because it’s desperate, but because it needs to fill orders. And that’s never a bad thing. Further, at $40,000 a pop for the hybrid solution, Hyliion’s looking at a minimum of $200,000 in sales and possibly as much as $4 million.
Clearly, it needs to do more to justify its market capitalization of almost $3 billion, but it’s headed in the right direction.
If you can afford to lose your entire investment, I’ve revised my opinion. Buy a half position now and wait to see if it falls to $15. If it does, I’d exercise the rest.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.