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Expectations for Pershing Square Tontine Look Overdone

Pershing Square Tontine Holdings (NYSE:PSTH) is a SPAC (special purpose acquisition company) that hit the markets in early September. Since then, PSTH stock has gone from $20 to $31.21. The market capitalization is a hefty $5.84 billion.

two businessmen shaking hands with peers at their side
Source: Shutterstock

A SPAC is a shell company that raises capital through a public offering of shares. The management team of the firm will then seek out an acquisition. For the most part, this is an alternative process to a traditional IPO (initial public offering). It is usually quicker and cheaper, with less paperwork.

Keep in mind that SPACs have been around for a long time but have been mostly a backwater of the financial world. However, during the past year, they have become red hot. One reason is that tech investors have moved into the category, such as with Virgin Galactic Holdings (NYSE:SPCE) and Opendoor Technologies (NASDAQ:OPEN).

So in the case of PSTH stock, what are the prospects? Is there still more upside from current levels? Well, let’s take a look.

It’s All About the Team

When it comes to a SPAC, investors are betting on the management team. There is a trust that they will find a great investment opportunity — within the next couple of years.

For PSTH stock, the team is definitely impressive. The chairman and CEO is William Ackman, who is one of the world’s top investors. In 2003, he founded Pershing Square Capital Management, which is a hedge fund that focuses on value opportunities. There are also occasional short trades.

Ackman is known for taking large positions and having a concentrated portfolio. This is certainly risky — but the rewards can be substantial as well.

By the end of last year, his fund posted a sizzling return of 62.8%, bringing the portfolio value to $11.4 billion. In Ackman’s investment letter, he noted that 2021 was the best year ever.

However, he has had his dry spells too. Perhaps the most notable example was from 2015 to 2018. During this period, he made disastrous trades in shares like Herbalife Nutrition (NYSE:HLF) and Valeant Pharmaceuticals.

The SPAC

PSTH stock is 100% owned by Pershing Square Capital Management. As is typical for a SPAC, the investment mandate is somewhat vague. This is essentially to allow for flexibility.

Here’s what the website says: “Our business strategy is to identify and complete a business combination that creates substantial long-term value for our stockholders. We intend to merge with one company through a transaction in which our stockholders (just prior to the initial business combination) will own a minority interest in the company that is created as a result of the initial business combination.”

There is no particular industry mandate. Rather, the focus is on companies with “predictable growing cash flows” that have “low sensitivity to macroeconomic factors.”

There has been buzz that the SPAC will buy a fast-growing tech unicorn. But hey, how many of these have strong cash flows? Not too many.

In fact, Ackman tends to invest in traditional companies. After all, this is where you often find value plays. Consider that the holdings for Pershing Square Capital Management include Lowe’s Companies (NYSE:LOW), Restaurant Brands International (NYSE:QSR), Chipotle Mexican Grill (NYSE:CMG), Agilent Technologies (NYSE:A), Hilton Hotels (NYSE:HLT), Howard Hughes (NYSE:HHC) and Starbucks (NASDAQ:SBUX).

Bottom Line on PSTH Stock

Ackman is no stranger to SPACs. Back in 2014, he used a shell company to merge with Burger King and Tim Hortons. The result was QSR stock, which has gone from $42 to $63.

In other words, it was not a blowout deal. And this should be a cautionary note for those considering PSTH stock. Investors could be setting themselves up for a disappointment.

On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling.  He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.    


Article printed from InvestorPlace Media, https://investorplace.com/2021/01/psth-stock-expectations-pershing-square-tontine-look-overdone/.

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