Seeking Alpha contributor, Jerry Kronenberg published an article in early February reporting on “speculation” that Pershing Square Tontine Holdings (NYSE:PSTH) was close to announcing the identity of its target unicorn. PSTH stock jumped on the news.
In the six weeks since that column was published, Pershing Square Tontine, a special purpose acquisition company (SPAC) run by Bill Ackman, has fallen $7, representing about 20% of its value, as it became clear the rumors weren’t worth the paper they were written on.
That wasn’t Kronenberg’s fault; the Street has a way of turning rumors into a sure thing.
As every day passes, the odds of an announcement rises, so be patient. If you don’t own the SPAC and you believe in Bill Ackman’s acumen, you might want to take a bullish position in it while you can.
The Average Gains of SPACs
Normally, I don’t give a lot of credence to Reddit posts, but a recent piece from contributor u/Edjaz caught my attention in the r/SPACs chat. The author looked at the pre-and post-announcement returns of 163 SPACs between 2015 and 2020.
The author wanted to determine how the disclosure of targets affect the share prices of SPACs.
“To summarize, on average we do find a positive merger-announcement effect on the stock price of SPACs. Especially for the period from ten days prior to ten days post the announcement, this effect is the strongest, with an aggregated abnormal return of 12.13%,” the Reddit author summarized in his or her February post.
So, assuming you accept the validity of the findings, every day you fail to buy PSTH stock means you might miss the 20-day window described above.
The Long-Term Return of SPACs
In February, CNBC discussed why it is important for investors to buy the shares of SPACs early rather than late.
In 2021, new SPACs averaged a return of 6.5% on their first day of trading, significantly higher than the mean return of 1.1% between 2003 and 2020. That’s according to University of Florida finance professor and initial public offering (IPO) expert Jay Ritter.
So getting SPACs’ shares during their IPOs is clearly the way to go if you want to make money betting on the investment vehicle. Unfortunately, while the first-day returns of SPACs in 2021 have been healthy, the CNBC SPAC 50 has lost most of its momentum, trading not too far off where it started the year after being up last month by more than 20% for 2021.
As the professor stated, when investors buy the shares of a SPAC on its first day of trading and hold it for the next 12 months, their average return is -15.6%. If they hold it for three years, their returns aren’t any better.
Ritter points out that institutional investors love SPACs for a particular reason.
“Institutional buyers figured out these are a great deal,” Ritter said. “The SPAC IPOs are essentially underpriced default-free convertible bonds… and nobody has lost money.”
Why is that?
Because, as long as they buy shares of a SPAC within 52 days after its IPO, they can give up their stock for the original price of the SPAC’s shares plus a small amount of interest, but keep the warrants that they receive; it’s the ultimate downside protection.
So, in the case of PSTH stock, one unit costs investors $20. Assuming an investor bought nine units for $180 and ultimately chose to sell nine shares of stock and exercise the warrants, the investor would get the $180 back, interest on the $180, and one Class A common share. (Each unit included one share of Class A common stock and one-ninth of one redeemable warrant to buy a Class A common share for $23).
Not a bad deal.
The Bottom Line on PSTH Stock
In January, I said if you can buy Pershing Square Tontine for $29 or less and plan to hold it for three to five years, you should do so. Now with Pershing Square changing hands for about $26, I still feel like it’s going to pop on the announcement.
As the Reddit author stated earlier, there’s a 20-day window of above-average returns that you don’t want to miss out on. Of course, those who buy the shares are taking the risk that Ackman will lay an egg and target a unicorn dud, causing the share price to sink to $20 or less.
At this point, if you can afford to lose 100% of your capital, I would get on the Ackman bandwagon sooner rather than later.
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.