Why PSTH Is the Poster Child of SPAC Hysteria

Bill Ackman’s foray into the SPAC market via Pershing Square Tontine Holdings Ltd. (NYSE:PSTH) has been illustrative, in my view. I believe PSTH stock highlights, in perhaps the clearest way, how the market is overpricing SPACs today.

An image of wooden blocks that say SPAC over a series of one dollar bills.
Source: Dmitry Demidovich/ShutterStock.com

This isn’t only my opinion. Bill Ackman, the fund’s originator, believes this to be the case. I’m going to highlight just how crazy this mania is for the sideline investor unaware of what’s going on.

First, let’s dive into why investors are going crazy over this SPAC right now.

Celebrity SPACs Doing Very Well

PSTH was launched on July 22 last year, to much anticipation. Hedge fund manager Bill Ackman noted in his recent annual letter this fund was extremely oversubscribed. In fact, Ackman had to cap the fund at $4 billion, despite more than $12 billion in demand after only two days of marketing on the road show.

Anyone who’s tried to raise money knows just how insane that is.

However, Ackman isn’t the only celebrity money manager on the block.

As I wrote about in a recent piece on Social Capital Hedosophia Holdings Corp IV (NYSE:IPOA), one of Chamath Palihapitiya’s six SPACs, having a celebrity name can be a good thing. In the case of Mr. Palihapitiya, his previous success in bringing Virgin Galactic (NYSE:SPCE) public in his first go helped his street cred quite a bit.

The thing is, investors are getting antsy. Similar to Palihapitiya’s IPOE and IPOF, Ackman’s PSTH has yet to find a suitor. The volatility this stock has seen in recent days is thus likely to continue until an announcement is made.

When PSTH first went public, this was also the largest blank-check company ever created, so the bar’s set pretty high right now. Given a larger blank check, a larger target must be found. These target companies tend to have more options to choose from, and exist in smaller quantities. The laws of supply and demand are at play here, so investors will likely need to be patient right now.

The question is: can they be?

Notes From Shareholder Letter Highlight Insanity of the SPAC Market and PSTH Stock

Okay, back to Bill Ackman’s shareholder letter.

Ackman is keen to point out in his letter that the market is pricing in a massive valuation discrepancy for his core fund, Pershing Square Capital (OTC:PSHZF) and his SPAC, PSTH.

How big is this discrepancy?

At the time of the letter, PSTH stock traded at a 106% premium to NAV (basically cash that was deposited in the blank-check fund). This percentage is now 177%, at the time of writing.

However, Pershing Square, his main fund, was trading at a discount to NAV of 33%. This percentage has gone down to approximately 20%, but is still a substantial discount.

Given the fact that both funds are managed by the same team, and Pershing Square holds 91% of the warrants and a large stake in PSTH stock, this doesn’t make sense. In fact, I think it’s completely irrational.

Conclusion

There are two things I think are going on right now in the SPAC world.

The first is a systemic lottery-ticket mentality in the market today. We all want to win the lottery, and it’s been proven we’re willing to make irrational decisions (buying a lottery ticket has a negative expected value) due to the increased weight we place on winning rather than losing. We all want to win the lottery, so we buy tickets even though we know we’re giving money to the lotto corporations.

The second is pure speculation. In the case of PSTH, investors need to speculate. In lieu of a deal, investors are forced to guess as to what the potential target could be for this SPAC. One of my favorite places to go take a look at how insane the speculation can get is StockTwits. Just take a look, for fun.

However fun speculating can be, it’s not investing. Buying a lottery ticket is fun, but it’s also not investing.

In my view, the mania surrounding SPACs has violated the fundamental laws of finance. These investment vehicles are valued well in excess of their intrinsic value, and as such, long-term investors can only get burned by owning them. If you believe in Bill Ackman, buy Pershing Square Holdings. It’s the same management team putting your money to work. However, instead of paying a premium of nearly 200%, you get a discount of 20% to NAV.

Sounds like a no brainer to me.

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


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