Last year, special purpose acquisition companies, or SPACs, have been nothing but fire. Just look at the introductory price dynamics of alternative-fueled transportation technology provider Hyliion (NYSE:HYLN) stock.
At one point, HYLN stock was trading hands near the $60 range. Even with a massive drop downward from that plateau, shares were still up substantially from their initial offering price of $10 heading into 2021.
Fast forward to the time of writing and the circumstances couldn’t be any more different. While the relevance of clean transportation remains, the sentiment does not. On a year-to-date basis, HYLN stock has hemorrhaged nearly 50%. Against the framework of the trailing year, the equity unit is staring at a loss exceeding 82%. What in the heck happened?
While it might sound overly simplistic to blame SPAC-based initial public offerings, there’s a valid complaint here. It all starts with the structural of the underlying investment vehicle.
Through my work at Benzinga, I’ve researched several SPACs or blank-check firms. Primarily, SPACs have no underlying business of their own. Instead, their goal is to initiate an IPO with the goal of identifying a merger target. Once ID’d and approved by the SPAC shareholders, the shell company and the target enterprise enter a business combination.
It’s why many journalists refer to SPAC IPOs as reverse mergers. It’s really a backdoor way of going public, “sneaking” around certain vetting procedures that traditional IPOs must endure. And because of this circumstance, everyone must look at HYLN stock or any other SPAC-led enterprise with at least a modicum of skepticism.
Put another way, SPACs are truly awesome for their sponsors and for the enterprise going public. But are they really profitable for the retail investor?
As Hyliion itself is proving, the inquiry is becoming increasingly difficult to answer in the positive.
HYLN Stock Risks Succumbing to the SPAC Graveyard
Last year, I was reading an article about SPACs from a fellow InvestorPlace colleague whose name escapes me. But the gist of the argument was that these shell companies and the business combinations they usually result in are geared heavily against the average Joe. When looking at HYLN stock and its performance in 2021, that thesis has proven prescient.
Recently, I came across a blog post by Barry L. Ritholtz, co-founder, chairman, and chief investment officer of Ritholtz Wealth Management LLC. He bluntly stated that SPACs stink. Well, he used another word which I’m not sure I can use so I won’t. Notably, he stated the following:
The key reason for this is that survivorship bias colors everything. Investors first learned of this through overstated mutual fund returns. Once we account for the funds that were closed (or otherwise removed from the dataset), much of the mutual fund investment outperformance disappeared. The same is true for collectible artwork, fine wine, automobiles, or other alternative asset classes.
Indeed, to his point, a few SPACs have performed remarkably well, DraftKings (NASDAQ:DKNG) being a prominent example. Likely, from the tremendous rally that DKNG enjoyed, many assumed that HYLN stock would follow a similar trajectory.
From the surface, it certainly seemed a logical conclusion. While Hyliion is essentially a transitional alternative transportation provider, it’s a practical one. We might not have the technology and the economies of scale to mass produce full-electric-powered commercial trucks. However, we can harness the best of fossil-fuel systems and electric-vehicle innovations to promote a hybrid solution, which is a strong selling point for the company.
However, the overwhelming sell orders by Hyliion insiders leads me to believe that this was an enterprise to benefit the C-suite, not the average Joe investor. Put another way, it’s a typical move by a SPAC.
Take Your Shots Accordingly
The above isn’t to say that there’s no chance in gaining a profit from HYLN stock. Especially at its current level, there’s an attractiveness to the narrative. Though challenges remain, Hyliion is hard at work building a practical solution for long-haul transportation via clean (or clean-ish) power.
Still, you’ve got to decide who’s benefiting the most from this particular IPO. If your due diligence suggests that Hyliion’s technology could integrate itself into the clean energy conversation, then HYLN stock might be worth the gamble.
As for me, I’m going to wait a bit longer to see if it can break out of its consolidation funk. So far, the signs aren’t looking so hot.
On the date of publication, Josh Enomoto 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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
