Lux Capital’s Josh Wolfe on why the buy-the-dip mantra will no longer work

Josh Wolfe is the futurist fund manager leading the charge at Lux Capital.
@LesliePicker

SPAC market starts 2022 with abysmal losses, abandoned deals

The oversaturated SPAC market is continuing to get crushed in the new year as speculative stocks with little earnings fall further out of favor in the face of rising rates, while a growing number of deals were abandoned in the tough environment.

 

Companies that went public via blank-check deals have been among those worst affected by January's tech-driven sell-off. Meanwhile, faced with unfavorable market conditions, many sponsors have been forced to scrap their proposed deals, sometimes even before the SPACs got listed.

 

"The SPAC bubble is bursting," said Chris Senyek, senior equity research analyst at Wolfe Research. "SPAC shares are extremely volatile due to their speculative nature."

 

The proprietary CNBC SPAC Post Deal Index, which is comprised of SPACs that have completed their mergers and taken their target companies public, tumbled 23% in January, even more abysmal than the tech-heavy Nasdaq Composite's 9% loss when it suffered the worst month since March 2020.

Some of the biggest losers last month included clean energy player Heliogen, self-driving related companies Aurora Innovation and Embark and 3D technology company Matterport, which all tumbled more than 50% in a single month.

 

SPACs stand for special purpose acquisition companies, which raise capital in an initial public offering and use the cash to merge with a private company and take it public, usually within two years.

 

The market enjoyed a record year with more than $160 billion raised on U.S. exchanges in 2021, nearly double the prior year's level, according to data from SPAC Research. Investors once piled into shares of these empty corporate shells hoping they would hit a home run.

 

After a year of issuance explosion, there are now almost 600 SPACs searching for an acquisition target, according to SPAC Research. As the market gets increasingly competitive, some announced deals failed to make it to fruition.

 

The planned merger of Fertitta Entertainment and the blank-check firm Fast Acquisition Corp was called off at the end of last year. Recent deals that have been abandoned also included online grill retailer BBQGuys, fintech firm Acrons and cloud software platform ServiceMax. 

 

Meanwhile, there has been a growing number of SPAC listing withdrawals, meaning the sponsors decided to pull the plug on their listing after filing the initial S-1. There were nearly 20 such cases in the month of January, a jump from only single digits in the prior two quarters, according to SPAC Research.

Delivering Alpha Headlines

Big thoughts from the big money

Seth Klarman says inflation is a 'real danger'

Baupost Group's Seth Klarman said surging inflation poses a big threat to the markets and he's hedging against outsized price gains. "We don't know how bad the current bout of inflation will be, but we believe that mounting inflation and the related possibility of materially higher interest rates are posing a real danger to financial markets," Klarman in an investor letter. "To protect against continuing inflation and the prospect of rising rates, we have purchased hedges that stand to gain in such an environment," he added.

Cathie Wood is buying Tesla again after steadily trimming position for months

Cathie Wood is again buying Tesla stock after a hiatus since June, signaling shares of the electric car maker may have fallen to a level the innovation investor finds attractive.Wood, founder, CEO and CIO of Ark Invest, scooped up 27,556 shares of Tesla in her flagship fund ARK Innovation on Monday, a position worth roughly $25.8 million, based on Tesla's closing price of $936.72. Monday's purchase adds to the 27,799 shares Wood purchased of Tesla last Thursday. The pair of purchases marks the end of a long freeze in buying for the long-time Tesla bull. Last week was the first purchase of Tesla in ARK Innovation since June of 2021.

Fundstrat's Tom Lee says get ready for a 'violent rally' in February

Fundstrat's Tom Lee said the stars are aligned for a massive risk-on rally in February after stocks declined sharply to start the new year. "The set-up looks like the 'V' for February is not Valentine's but violent rally," Fundstrat's co-founder and head of global research told CNBC.

Lee said several contrarian signals have reached levels that suggested a strong buy signal, including retail sentiment, which hit its worst level since 2013."When institutional investors are cautious, retail basically priced in a bear market and sentiment's worst in eight years, you could have a huge rally," Lee said.

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