I am usually a big proponent of leveraging other people’s homework. If someone has a good idea, I am not too shy to chase them. This is the opportunity with Pershing Square Tontine Holdings (NYSE:PSTH). Someone famous put together a pile of cash, and investors are flocking to it like moths to a light. PSTH stock quickly rallied 45% after its inception last year. It has given back a little, but the bulls are still pretty happy about their winnings.
The thesis to own it is pure speculation. Maybe I would offend fewer people by calling it faith in Bill Ackman’s competence.
The man is a legend on Wall Street, especially if you ignore his shellacking that he took over Herbalife (NYSE:HLF). This was the very public spat between Ackman and Carl Icahn. Now he has organized $4 billion under the PSTH roof searching for a venture to buy or back.
This is where the opinions will diverge. Some investors believe in him and others don’t. Neither side will be proven right until after the fact. I get why people would want to buy and hold. PSTH stock offers a cheap price of admissions into the SPAC world.
A Solid thesis?
While I am not one to own the shares, I definitely do not recommend shorting it. It’s a pie in the sky so far — how could anyone have a negative thesis on that?
This is not the case where a company has a product or service. They are literally still seeking the opportunity. The bearish thesis would be that there is nothing to buy out there. That is unlikely. My bet is that PSTH will invest this year.
But the outcome of said investment is not necessarily a slam dunk win.
Meanwhile, I will enjoy watching and trading the action, because things have been crazy on Wall Street. Just consider what happened on Monday. The money chasing questionable stocks is incredible. Within two hours, the small-capitalization stocks soared in the morning then fell 3%. They closed almost flat and now they are up again. Traders are chasing speculative stocks like GameStop (NYSE:GME) for example. It doubled in in the morning hours and then gave it all back. The GME options implied volatility skyrocketed to 600% which I haven’t seen before.
All of this has nothing to do directly with PSTH stock, but it has everything to do with the concept. Last year, we saw the emergence of SPACs, and investor loved them. This year it will be interesting to see if they can follow through with that meme. the onus is now on the companies like this to deliver on some of their promises.
Trade the PSTH Stock Until There Is a Thesis
Since the fundamentals don’t exist yet, this sounds less like investing and more like what goes on in Vegas. But I don’t mind trading the speculation short term, especially inside the bullish trend. PTSH has fallen into a pivotal zone around $26 and $27 per share. This should provide some support, so it makes for an opportunity for the bulls.
This by no means is a floor, but it is a place where buyers could wade into it. The pattern is clear because they did it near $25 so I expect they will try near current levels.
If for any reason the stock falls into or below $25 per share, I’d be worried. I have to stress once more that there is no fundamental thesis behind buying Pershing Square stock yet. So it is imperative that investors limit their exposure to it.
The options markets can help with that by limiting the out-of-pocket expense. Instead of risking $28 per share to buy the stock outright, investors can buy call options. They are cheaper, which means smaller risk. Conversely if I’m willing to own shares now, then I can sell puts instead to lower my risk level.
For example, I can sell the PSTH stock Sep $20 put and receive a $2 credit per contract. That’s right, I get paid for the opportunity to buy the shares 28% below current price. The break-even price would be $18 per share on that scenario. I am not condoning doing so unless someone is very comfortable betting on the success of this financial venture.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.