On Jan. 29, InvestorPlace’s Mark Hake predicted that Star Peak Energy (NYSE:STPK) would easily double once it merged with battery-storage management company Stem, Inc. If that’s the case, STPK stock appears to be ahead of itself.
As I write this, Star Peak Energy stock is trading around $44, up 13% midway through the day’s trading. Who knows where it will be by the end of the day. What I do know is that since my colleague’s prediction, STPK has jumped 63%. It needs to add another $24 to meet his $67.91 valuation.
On Feb. 11, Stem provided investors with an update about its combination with Star Peak Energy. According to the company, the merger should happen by the end of March.
So, Star Peak stock has approximately 5-6 weeks to meet Hake’s estimate.
At this point, it might make sense to consider an alternative possibility, one that’s very close to the sponsors of Star Peak Energy.
An Alternative to STPK Stock
As you might already be aware, Star Peak Energy is sponsored by key people from alternative asset manager Magnetar Capital. Magnetar was founded in 2005. Today, it has more than $12 billion in assets under management.
Star Peak Energy’s original focus was to find a target that is likely to benefit from the energy transition that’s taking place on a global basis. Stem became its ultimate target.
As my colleague stated in his article, Stem’s projected sales this year will be $147 million. In 2022, revenues are expected to more than double to $315 million. Good things are happening.
Based on Hake’s enterprise value (EV) estimate of $9.2 billion, the merged entity has an EV that’s 63 times 2021 sales and 29 times 2022 sales.
Magnetar Capital’s Second SPAC
“[W]e currently intend to focus our efforts primarily on identifying businesses seeking to be a market leader in, and/or benefit from the increasing global initiatives to improve sustainability and/or reduce global emissions,” the SPAC’s prospectus stated.
“To that end, we intend to seek opportunities that capitalize on the expertise and ability of our management team to identify and transact with a business in the broadly-defined sustainability sector.”
Star Peak Corp II appears to have a slightly broader mandate that could see it combine with a business focused on the food or agriculture industries.
STPC.U is currently trading at $12.60, just 26% higher than its unit price in early January when it went public. By comparison, STPK is up 146% in the same period.
In 2020, Stem’s gross profit was estimated to be $4 million. By 2026, it’s expected to grow to $483 million by 2026 on $1.17 billion in sales. It expects to be free cash flow positive in fiscal 2023 — $70 million on $526 million in revenue — growing to $381 million by 2026, a 33% FCF margin.
So, there’s no question Stem’s potential for long-term capital appreciation is excellent.
That said, the keyword is “potential.” Estimates are only estimates until they are actuals. For now, investors can’t afford to look too far into the future.
The Bottom Line
STPK has a merger partner. STPC.U doesn’t. That makes the former far more of a known commodity than the latter. However, the downside risk for STPC.U at this point is far less than STPK.
In my mind, that makes Star Peak Corp II a much better speculative bet at this point.
If you like STPK stock but don’t own it, I would put half of a full position into both holdings. That way, you’re reducing your overall risk while allowing for future upside potential from either of them.
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.