Special-purpose acquisition company (SPAC) investors are feeling the burn lately. The Defiance SPAC ETF (NYSEARCA:SPAK), an exchange-traded fund focused on SPACs, details all the pain. After peaking in February, the SPAK ETF has declined 10% year-to-date, underperforming a 14% gain in the S&P 500 over the same period. Meanwhile, anyone who has turned to The King of SPACs — venture capitalist Chamath Palihapitiya — for perspective hasn’t found much solace either.
Social Capital’s annual investor letter, published earlier this week, made no mention of post-IPO performance or any of the firm’s recent SPAC IPOs. And after several high-profile blow-ups, including Clover Health (NASDAQ:CLOV), which is currently facing a Department of Justice investigation, and real estate platform Opendoor Technologies (NASDAQ:OPEN), which is down over 50% from its peak, ailing growth investors are clamoring for a changing of the guard.
However, Bill Ackman might have the antidote: Pershing Square Tontine Holdings (NYSE:PSTH) stock is his cure.
Ackman’s SPAC, Pershing Square Tontine Holdings, is setting out to find a “mature unicorn” to take public. His hunting style is very different. First, forget the hypergrowth storytelling, which arguably created the bubble in the first place. Get back to long-term, fundamentals-based investing. Second, in a SPAC market where insiders still reap most of the spoils, investors can change the rules so that everyday people win.
In a sideways-trading market trading that’s peppered with volatility, making money is tougher this year. And with valuations for many tech stocks looking stretched, Ackman’s back-to-basics style of investing feels fresh to weary growth investors. PSTH stock has jumped 10% in the past 2 weeks, despite the fact that a deal has yet to be announced and may still be weeks away (if at all).
Redditors call it “hopium.” But if Ackman finds his unicorn, he’ll change the game, not only for SPACs — but for growth investing.
Here’s a look at Ackman’s investment style, how it’s different and why investors should listen.
SPACs: Are We Still In a Bull Market? Buckle Up.
With the coronavirus pandemic mostly behind us, it’s ironic that investing in 2021 has been so gut-wrenching. Stocks have been volatile as investors ponder whether the equity market really is too expensive. And there’s the dual headwind of re-opening and inflation. But, if we’ve learned anything from last year, it’s this: equity returns don’t always align with the current state of the economy.
No one understands this disconnect more than Cathie Wood, who has built an entire investment style around “disruptive innovation.” Wood has always hunted unicorns: technology stocks that potentially change the way the world works. This strategy worked extraordinarily in 2020. Historic government spending and monetary policy created a rising tide that had investors piling into tech stocks at any price.
The result: Wood’s flagship ARK Invest ETF (NYSE:ARKK) delivered a whopping 153% return on futuristic winners like EV automaker Tesla (NASDAQ:TSLA), sports-betting operator DraftKings (NASDAQ:DKNG) and spaceflight tourism operator Virgin Galactic (NYSE:SPCE).
But this year, with equities cooling amid rising interest rates, the upside in most early stage growth stocks looks priced-in. Or, at the very least, risky. “WoodStocks” are struggling, with ARKK down 10% year to date, underperforming the S&P’s 14% gain over the same period. Combined with recent concerns over the size and liquidity of the fund, many observers are scratching their heads over whether Wood truly is chasing the right kind of unicorns. About two dozen investment firms initiated short positions on her ARKK ETF in Q1.
What Does a Mature Unicorn Look Like?
Ackman’s message is very different. In contrast to last year’s buzz around what’s new and revolutionary, he’s out to find a “mature unicorn.” The inclusion of the word “mature” is important here. Instead of looking for the next big disruptive thing, PSTH’s focus is on finding proven businesses with room for growth whose stock prices don’t yet reflect their potential. That’s not the typical approach we’ve seen many take with investing in SPACs more recently.
You can often find mature unicorns among early stage recovery plays. Take, for example, the following:
- The burrito turnaround at Chipotle Mexican Grill (NYSE:CMG)
- The home improvement story at Lowe’s (NYSE:LOW)
- The return to leisure travel at Hilton (NYSE:HLT)
- The multi-year earnings growth cycle at tech giant Agilent (NYSE:A)
Looking closely, there’s a unifying investment discipline that ties these four very different companies together. Each is a well-established business with a good brand, durable business model and each has room for revenue and margin expansion. Investors who jump in while these good businesses are undervalued should capitalize on the green shoots of recovery.
A Different Market, a Different Playbook for SPACs
Mythical creatures aside, there’s another way Ackman’s style is different. While PSTH is predominantly long only, it isn’t shy about locking in gains. This style of swapping a low returning asset for a higher one is a stark contrast to Wood, who mostly adds to already concentrated positions. Earlier this month, ARK doubled its stake in telemedicine platform Teladoc Health (NYSE:TDOC) and added significantly to its position in data analytics flyer Palantir Technologies (NYSE:PLTR) following an already strong Q1.
While Cathie is consolidating, Ackman is doing the opposite.
Also this month, PSTH sold a wildly successful position in Starbucks (NASDAQ:SBUX), which was established in 2018 at an average cost basis of $51 (the stock trades around $113 today). Ackman used the funds to buy a 6% stake in Domino’s Pizza (NYSE:DPZ). Some observers have criticized the $1 billion position in “last year’s COVID winner” as both brazen and counterintuitive. But, for the man who lost a five-year battle shorting Herbalife Nutrition (NYSE:HLF), being different is OK.
Ackman sees plenty of room for growth in Domino’s, largely due to the pizza chain’s “crown jewel” delivery infrastructure. This should allow the company to generate better margins than third-party aggregators like DoorDash (NYSE:DASH). It should also provide better service than companies like DASH as well. (Ackman takes Domino’s 30 minute delivery guarantee very seriously.)
PSTH Stock: A New Kind of SPAC
Ackman’s SPAC, Tontine Holdings, embodies a carefully honed investment discipline — starting with the name itself. The tontine, a capital raising structure popular in the 17th century, allows investors to redeem dividends from the equity positions of its deceased members. It may sound macabre, but Ackman believes the survivors, the shareholders who stick with the company, should get the spoils.
This shareholder-friendly attitude is baked right into PSTH’s organizational structure. Ackman has outlined a more democratic way of taking his mature unicorns public — one where long-term shareholders benefit.
The most obvious way Ackman’s SPAC is different is in the way it treats early investors. One of the primary knocks on SPACs is that they are dilutive to de-SPAC investors who buy-in after the merger target is announced. In addition to the common stock, SPAC investors also receive warrants as an extra sweetener.
These warrants are “detachable” and can be traded as separate securities. As a result, they’ve created a short-term arbitrage opportunity for early SPAC investors. Insiders to cash out quickly, creating a clear conflict of interest. At the same time, the growing gap between the returns for these insiders and later investors exacerbates another concern. Investors might question whether hedge funds and other early SPAC backers have any commitment to these businesses in the long run.
To the Victor Belong the Spoils
Another important thing to consider when comparing PSTH to other SPACs is that Ackman has skin in the game.
Unlike virtually all other SPACs, whose warrants are entirely detachable, two-thirds of the warrants issued to PSTH shareholders are not detachable. This structure discourages the arb community in favor of long-term investors. Investors who choose to sell before the SPAC merger closes automatically forfeit two-thirds of their warrants.
And there’s another incentive for early investors to hold through the closing. Shareholders who do redeem forfeit their warrants. These are distributed to remaining shareholders. It’s a “tontine” for the 21rst century. Investors who stick with the business win.
Ackman’s longer investment horizon and protective stance toward shareholders contrasts sharply with Palihapitiya’s mode of operation, which has raised eyebrows over his long-term commitment to his investments. In December of last year, after a tough week, the venture capitalist began selling his personal stake in Virgin Galactic — a little more than a year after its $2 billion IPO. The March liquidation of his remaining personal stake, worth $213 million, coincided with the company’s announcement of further delays to its spacecraft testing program.
Chamath suggested the intent was to free up capital to invest in companies that address inequality and climate change.
PSTH, on the other hand, is an iconoclast in another way. It’s the first SPAC that doesn’t pay management fees or special compensation to its sponsors. Typically, SPAC sponsors make money not only from the warrants, but also from a 20% ownership cut in the company. This sizable chunk of shares pays handsomely for the sponsor — regardless of whether the post-IPO shares go up or down. Ackman can make money by growing his unicorn over the long term — without diluting his shareholders in the process.
Bill Ackman’s Market ‘Antidote’
Ackman’s SPAC merger target is still “‘weeks’ away,” according to the CEO’s comments on this week’s first quarter earnings call. But one thing is certain: The target is expected to be a “proven brand” that’s also a private, large capitalization, high-quality, VC-funded growth company. The mature unicorn is a stark contrast to the vast majority of SPAC merger targets we’ve seen in the past 18 months — many of which are early-stage companies with unproven business models and a tenuous path to profitability.
Ackman’s mature unicorn, if he finds it, could be the first long-term SPAC success story. And that “hopium”– coupled with speculation around a potential target — has been enough to move PSTH stock. In contrast, Chamath’s SPACs which haven’t yet announced targets — Social Capital Hedosophia Holdings Corp. IV (NYSE:IPOD) and Social Capital Hedosophia Holdings Corp. VI (NYSE:IPOF) haven’t budged.
It looks like investors want a new drug.
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On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.