Ever Upward
SPACs – special purpose acquisition companies – had their moment. For about six months until this spring, they were the hottest thing in the market – hotter even than meme stocks. That ended, though, thanks to a combination of a few poor deals that made institutional investors pull back from supporting SPACs and regulatory crackdowns that have dramatically slowed new blank-check creation. In the Greentech space, however, that retreat means there are some opportunities to be found amid the market detritus. That’s our focus this issue. We sorted through the more than 850 active SPACs in the market, identifying 71 that are ESG focused and then whittling our selections down from there.
These mark our first additions to the Excelsior (“ever upward”) portfolio. Excelsior is our special opportunities portfolio for occasional dips into equities that don’t fit into our regular Real Money Portfolio approach and strategy. The Real Money Portfolio is meant to be fully invested at 12 holdings of equal starting size, a design allowing us to seek market-beating results while containing long-term risk. Our approach in the Real Money Portfolio for each selection is largely the same too – a collection of chart and technical screens bolstered by fundamental evaluations. Excelsior will tend to be riskier: we don’t have a recommended position size among its recommendations (that is, don’t anchor buying to the Real Money Portfolio sizing) and selections often don’t have the trading history to be vetted deeply by technical analysis–as is the case with our SPAC choices. Still, we see SPACs as a type of late-stage venture capital opportunity and there are some very exciting businesses coming to market in solar, EVs and materials. We also discuss ways to grab quick, easy profits in any SPAC. Enjoy!
No issue ranks higher than climate change on our clients’ lists of priorities. They ask us about it nearly every day.
-Larry Fink, CEO of BlackRock, the world’s largest asset manager in his annual letter to CEOs.
A 19th Century Japanese print of Ben Franklin’s electrical experiment
Source: Library of Congress
Feature Story: Greentech SPACs
In 1998, investors had more than 7,500 publicly traded companies to choose from on U.S. stock exchanges. Since then, the number has declined to about 3,500. At their peak, just five months ago, SPACs were seen as a way to reverse the decline and get promising companies that could use capital to market–with more than 850 SPACs public or looking for an IPO, that certainly seemed to be the case. But investors have backed off from SPACs since April. Part of this has been bad deals. EV maker Canoo (GOEV) is an example, because it pitched one business model to investors and then switched it during the closing period. That left institutional investors who provided the extra capital to close deals (the PIPE funding) stuck holding an investment they couldn’t sell due to lock-up agreements. For that reason and others, hedge funds and mutual funds decided they didn’t need to be PIPE investors–they could just wait until the deal closed and buy it then. Similarly, retail investors got burned by buying on the immediate excitement SPAC merger announcements would bring then seeing the price deflate quickly back to prior levels. SPACs now as a whole, with a few exceptions, essentially trade around their IPO price regardless of deal status or management.
That presents opportunity for us.
As traders, SPACs can be approached two ways. One way is essentially arbitrage, similar to buying a closed-end fund or ETF at a discount to net asset value and harvesting the difference. SPACs seeking targets but which haven’t identified one are simply pools of money. Every SPAC by rule has to put the bulk of the capital raised at its IPO into trust, callable on demand by shareholders at any point through the vote to approve a proposed merger. Generally, today SPACs trade in line with their per-share trust value. There are modest, quick profits to be made buying SPACs that slip below their per-share trust value. For reasons probably having to do with speed and convenience (and some ignorance) people do sell SPAC shares at prices below their intrinsic, trust value.
How do you know what the per-share trust value is? Look in the latest quarterly filing. In the balance sheet, find the “cash and investments in trust account” line, subtract any taxes and divide by the outstanding shares listed in the same document. It’s a bit of work and quite possibly an inefficient use of time given the small margins to be captured. Nonetheless, we’ve had some success buying SPAC shares at as deep as a 10% discount, often when previously reported deals fall through and upset investors dump shares. One can then make an immediate request for the trust value of the shares–a process you have to do through your brokerage–or wait for the market to do the work for you and get shares back to their trust value. If you like the SPAC’s target and management, you can wait and see if they strike a deal you like, then decide to get the IPO capital back or stick with the deal.
But we’re interested in a bigger fish: quality companies that present good opportunities given the market’s current disdain for SPACs. That brings us to our recommendation this issue: selected Greentech SPACs with pending deals.
We collected data of 851 SPACs, dropping those yet to price their IPO, leaving 573 now trading. Among those, we found 71 that are ESG-focused, mostly desiring a Greentech target with a minority seeking social and governance-inspired deals. Of those, 37 have announced mergers that have yet to close. We eliminated three SPACs because their target companies aren’t ESG by our judgment and dropped another because it’s China-based acquiring a Chinese company and therefore has too much country risk for us right now. Three we set aside to conduct more research and one closed its merger just before publication.
The bulk of the others are intriguing, but strike us as too long-developing to be worth buying now. That is, projections of meaningful market share, revenue or even product introduction are too many years in the future. Some are truly engaging ideas. For instance, Sustainable Opportunities (SOAC) and its target DeepGreen Metals propose to gather metals needed for EVs, batteries and the like from the seabed where they are plentiful and not an environmental blight to collect–but even testing the idea in the field is years away and may never happen. Similarly, many makers of electric planes, EVs, EV chargers and novel battery storage ideas didn’t make the cut because 2025 – a popular year for business plans supposedly taking hold – is just too far off. We can buy them later as they prove themselves.
That leaves us six SPACs to consider. Our approach here is to buy all six as a basket, in the belief some will be mediocre, one or two will flop and one or two may prove to be strong performers. The truly profitable ones should make up for the losses in others. There are two ways one can buy these SPACs. One is to purchase the shares outright. This gives the backstop of having a claim on the trust capital if the deal falls apart or you decide, before the merger closes, you want out. Plus, once the deal closes you should always have some capital to claim on a sale, if the post-merger company flops in trading (that is, treat them like normal stocks with stop losses). This is the more conservative approach.
For the Excelsior portfolio, we’re going more aggressive and are going to buy warrants in each company. Warrants have a very high risk: they will be worthless if the SPAC never closes a deal. They also will be very volatile, with a few cents move in the trading day representing high percentage moves. Most warrants are exercisable for shares at $11.50 or higher, which means if you pay $1 for a warrant, you’d need to see shares hit $12.50 to break even once the SPAC merger has closed. That also means warrants can pay off handsomely. However, their profit potential is constrained by mandatory redemptions companies can demand. Nearly every SPAC has a clause that warrants can be forced to be redeemed if the average price in 20 of 30 trading days is $18 or higher. If you don’t redeem or sell your warrants within (usually) 30 days after that clause is invoked, your warrants are rendered essentially worthless. You may also be forced to convert by presenting cash to meet the strike price (it isn’t a given cashless conversion will be offered). Most SPACs now also have a similar redemption if the price is $10 or higher after the warrants become exercisable. In those cases, what the warrants are worth is dictated by a table of conversion prices in the prospectus based on how many months until the warrants expire and the share price. That means warrants can be made exercisable under $11.50 by the company, but could tamp down returns. In these cases, companies usually offer cashless conversion. It will vary by SPAC, but generally speaking, the highest cashless conversion rate in the $10-$18 conversion will be around .361 and go down from there based on time remaining and lower price.
Another legitimate risk here are corporate projections. We tried to constrain our dependence on forward projections and far-in-the-future metrics. We do, however, rely on current and next year projections by the companies as being fairly reliable. Keep in mind the companies – and especially their SPAC partners – have a lot of incentive to close their mergers.
Here are our SPACs. SPACalpha data, which we cross checked with another website, SPACtrack, is the source for per-share trust values. Regulatory filings are the source of other information.
SPAC: Artius Acquisition Inc (AACQ)
Share price: 10.04
Share trust value: 10.01
Warrant price: 2.52.
Artius is merging with Origin Materials which makes carbon neutral/negative plastics. Origin uses wood chips, cardboard, pulp and cotton waste, rice husks and sugar cane stalks as feedstock to replace oil in materials, mainly to make PET plastic. Realistically, cut trees will be the primary feedstock, so it’s not quite a kumbaya recycling story, but freshly cut trees are ultimately a sustainable resource if they are replanted. Origin is building its first production plant in Ontario–chemically, the approach to making usable molecules is no different than using fossil fuels. The company claims to have $779 million in sales booked for when production begins, plus another $1.1 billion in capacity reservation agreements. Ford, Danone and Nestle are among customers. Artius’ CEO bought shares last week at 10.01 , and the Wall Street firm Craig Hallum has a price target of 22 on Origin, post deal close. Apollo Management agreed to buy up to 3 million shares at 10 in a private placement when the merger closes. Those suggest our buy thesis here is on target.
SPAC: Live Oak Acquisition Corp. II (LOKB)
Share price: 9.97
Share trust value: 10.00
Warrant Price: 2.50
The second Live Oak SPAC is merging with Navitas Semiconductor. Navitas is an Irish-based company with most of its operations in the U.S. (management is American) and China. It produces gallium nitride semiconductors. Gallium nitride is seen as the successor to silicon chips, which have about maxed out their theoretical potential. Gallium nitride is a superior conductor of energy, able to sustain higher voltages and loses less power as it conducts – that is, it’s more efficient, with electronics using 20% less power than silicon-based chips. Right now, the chips are seen mainly in mobile phone chargers and small portable power supplies and are moving into TVs. The real opportunity is in data centers, where cutting electricity costs is highly desirable, in solar panels – because they reduce weight and cost per watt due to their efficiency – and EVs because they make for better fast chargers. Navitas’ sales are small right now at $27 million for 2021 (firm, booked production from customers including Amazon, LG and Lenovo), more than double last year. It’s projected to grow very fast. Third-party estimates proffered by the company are that the market for gallium nitride chips will double every year over the next five years to $2.1 billion, from $20 million last year. The current valuation is pricey: the market cap assuming no redemptions before the merger is $1.54 billion. But the consensus in engineering circles appears to be gallium nitride is the wave of the future.
SPAC: Peridot Acquisition (PDAC)
Share price: 11.81
Share trust value: 10.01
Warrant Price: 2.60
Peridot is merging with Li-Cycle, which recycles lithium-ion batteries. The company has a closed-loop process that generates no waste and can recycle the components of a battery for resale. Its Rochester, N.Y. plant can process 5,000 metric tons a year right now, expanding to 60,000 tons in 2023. Another facility, in Arizona, will open within a year to process 10,000 tons. It’s a very young company: it generated about $900,000 in revenue last year, losing $5.04 a diluted share. The enterprise value of Li-Cycle in the merger is $1.1 billion. Right now, less than 5% of li-ion batteries are recycled and the lithium market is seen as becoming very tight as EVs surge. The belief is that there will be inherent demand for lithium due to market tightness, and the beneficial nature of the recycling could support demand even if lithium supplies end up better than expected.
SPAC: RMG Acquisition II (RMGB)
Share: 9.96
Share trust value: 10.00
Warrant price: 1.68
RMGB 2 is merging with ReNew Power, India’s largest renewables-only company, with 5.9 gigawatts (GW) of capacity and another 4.3 GW committed (in developed and/or with signed awards), split roughly evenly between wind and solar. The company will generate $699 million in revenue this year, has $905 million in committed sales for 2022 and $1.1 billion the year after that. All the production is under long-term contracts (with an average life remaining of 22 years) at set rates with state and sovereign entities, according to information contained in an independent debt rating note this month. Company-disclosed ebitda margins are huge at 83% (yes, 83%) and seen edging higher in coming years. Goldman Sachs is part owner of ReNew, and will hold 32% of the company post-merger, with the Canada Pension Board owning 13% as second-largest shareholder. Renewable energy on a utility scale costs less than traditional fossil fuel power in India without any subsidies, meaning renewable power demand is expected to meet all of India’s electricity growth. The country will triple its electrical demand in the next decade, which in effect means renewable demand will grow 10-fold. If you wanted to pick just one SPAC from this issue to buy, this is the one.
SPAC: 10X Venture Capital Acquisition Corp. (VCVC)
Share price: 9.97
Share trust value: 10.00
Warrant price: 1.76
This SPAC is bringing Ree public. It’s an Israeli company that has rethought the design for EV chassis. The Ree chassis eliminates the traditional center-forward engine altogether and places the mechanics that move the vehicle and the batteries in the four wheel hubs, making the chassis appear like a skateboard. That allows for more room on the chassis, making cars, vans and buses more accommodating in the same footprint. It also allows for modular manufacturing of different sized chassis. There are a lot of EV options in the market right now: Ree gets the nod because its PIPE investors include Magna International (MGA) – the large OEM car maker – and India’s Mahindra & Mahindra carmaker. Both say they will build EVs with Ree. The company claims it will have $19 billion in sales in five years, but it doesn’t start building units until next year. Magna is the key here: any trouble with that deal is a reason to sell. This SPAC doesn’t have the $10-$18 warrant conversion clause, just when shares trade at $18 and up.
SPAC: Tortoise Acquisition II Corp. (SNPR)
Share Price: 10.05
Share trust value: 10.00
Warrant price: 2.18
Just as EV sales are growing swiftly, but discerning future winners from losers is difficult, it’s same with EV charging. Tortoise II is bringing Volta Charging public, a maker and operator of charging stations in the U.S. In 2020, Volta generated $25 million in sales from 1,507 charging stations in the U.S. and says it will make $47 million this year from about twice that. Its business model is to combine display advertising with charging: basically putting ads on the charger (they’re about the size of shopping mall directories, or the side of a bus stop shelter). The company aims to put the chargers at or near retailers where ads can generate more immediate spending. Part of its thesis is that food retailers in particular will want Volta charging stations on their property and food brands will want to advertise on them because gas stations really make their profits from food purchases. With no need for gas, that spending becomes up-for-grabs. In the long term, Volta says it can begin to use data from charging stations and ads to drive further advances. We’ve seen share buying tick up after Volta makes presentations at institutional investor conferences, indicating fund managers are supportive. The company holds an investor day June 17, for those who want to do more research before buying. The address is vimeo.com/showcase/voltainvestorday and the password is VoltaInvestorDay.
Our Greentech Timer
Greentech appeared to have made it over a significant technical hurdle last week by closing above its 200-day moving average. Headwinds came in the form of skepticism about a U.S. infrastructure plan that had been priced in and the index took a step-back Tuesday, finishing below the long-term moving average. On the plus side, the 20-day and 40-day moving averages sit below the price and those MAs are upward or about to turn upward. That means the market will likely be ‘forced’ to choose a direction as bulls and bears tussle and various technical levels. Greentech doesn’t need an infrastructure bill to be successful–the embrace of renewable energy in the recent years in an unfriendly U.S. regulatory environment proves that. However, it’s difficult for investors who saw the many billions proposed for projects that would benefit the sector directly to not feel disappointment and the lack of a deal so far. Still, the technical picture isn’t all bad – there is what should be strong support about 15% below these levels and some bullish indicators in the charts and other technicals.
Our Greentech Timer is fully bullish when the index is above the 20-day and 40-day moving average and those averages are upward trending (ideally, the index is also above an upward trending 200-day moving average too, but not essential). The message here is to be cautious, be stay optimistic. Specific sectors– solars, EVs and, slipping bearish this week, organic- and eco-friendly food – continue to be in worse shape and demand careful treading.
The ESG Three
The ESG Three are three technically strong stocks selected from the 200 most-held stocks in ESG funds. ESG funds do hold environmental stocks in their portfolios, but by and large they tend to focus more on blue-chip companies drawn from every industry which are rated highly in social and governance aspects. These aren’t formal stock picks but suggestions for those looking to explore additional stocks beyond the Greentech portfolio.
Cloudflare (NET)
What is it?
A content delivery provider for websites and Internet services companies
Why is it ESG?
Detailed anti-corruption policies and an independent lead director give better-than-average corporate governance. It is among the most-lightly held stocks in the top 200 of stocks owned by ESG funds.
Why now?
Content delivery companies make the Internet workable for fast-loading content and streaming music and video services. Demand is rising fast and Cloudflare’s sales are growing at a better than 40% clip. The company loses money given the scale needed to compete but has high gross margins (75%), suggesting profits–eventually. Shares look to have broken out of a six-month range between 66 and 86. That makes the 106 area a logical destination and 86 the first support.
Snapchat Inc (SNAP)
What is it?
A social media company that uses photo-based content
Why is it ESG?
It is better among peer social media companies about respecting user privacy and combating the spread of misinformation. ESG funds own $41 million in shares.
Why now?
Management disclosed 500 million active monthly users and started detailing to Wall Street the path it sees for expanding its services, like linking to its Snapchat Maps for users to find other users, and live events they can interact with (sports, concerts). The company also has rolled out ways for users to send payments (“tokens”) to content creators. That will encourage creatives to use the platform and generate an undisclosed level of fees for Snapchat. Shares are in a range now, consolidating. One can buy on the break out from the range – meaning a close at 66 or higher, or wait until shares drift to the low end of its range, near 51.
Roku Inc (ROKU)
What is it?
A streaming TV service
Why is it ESG?
It’s better than other media peers at employee compensation and corporate governance. ESG funds own $37 million of shares.
Why now?
Cable cord cutting continues and Roku offers a provider-agnostic platform for streaming apps and has made inroads by integrating its service out of the box with new televisions. It has begun producing and obtaining its own original content and exclusive deals, including pay-per-view movies entering theaters. Shares have been consolidating in recent months after a strong back half to 2020. They appeared to be starting a move higher again but are flashing a warning. Wait until shares can retake 360 before buying. Support is at 335 and 312.
Greentech Portfolio Update
Our primary portfolio is the SX Greentech Real Money Portfolio – we invest alongside subscribers in the picks we make. That portfolio is designed to be fully invested at 12 stocks of equally sized initial investments. This gets us enough opportunities to capitalize on Greentech’s advances without risking too much money in any one position. Always remember sell stops are essential to long term success to our approach. The SPACs we’re buying this issue are in a different portfolio – our special opportunities portfolio called Excelsior. We have one SELL recommendation today, FCX, which has breached our sell stop.
| SX Greentech Advisor Real Money Portfolio | ||||||
| Stock | Buy Date | Buy Price | Price on 6/15/21 | Sell-Stop | Gain/Loss | Rating |
| Chara Solutions (CHRA) | 6/3/21 | 6.11 | 5.99 | near 5.25 | -2% | Hold |
| Freeport-McMoRan (FCX) | 5/19/21 | 40.86 | 37.60 | near 38.50 | -8% | Sell |
| KraneShares Global Carbon (KRBN) | 6/3/21 | 34.23 | 34.65 | near 32.75 | 1% | Buy |
| Steel Dynamics (STLD) | 5/19/21 | 61.13 | 63.18 | near 59.25 | 3% | Hold |
| Trex (TREX) | 5/5/21 | 107.44 | 99.39 | near 87 | -7% | Buy |
Chara Solutions (CHRA)
Chara is range-bound right now. It has edged below support at 6 we wanted to see hold, but on lighter-than-average volume in recent sessions and with little for bulls or bears to rally on. The uptrend remains intact and we still recommend maintaining the sell-stop near 5.25 and shifting our recommendation down a notch this week. HOLD
Freeport-McMoRan (FCX)
FCX has a large down day Tuesday on rumors China will release state reserves of copper and other metals to tamp down speculation in commodities. FCX broke down through our sell-stop recommendation of near 38.50. Generally, closing prices are more important than intraday, and since we closed under our sell stop Tuesday, we should sell today. The level of 36 is the next important support level for those holding on. SELL
Steel Dynamics (STLD)
Shares have surrendered about 5% since peaking last week at 66.51 though we remain a couple of dollars in the black. Sentiment around the environmentally preferable steel maker is good and shares appear well-positioned. We will maintain our stop loss recommendation near 59.25 to avoid getting stopped out too easily here. Shares will pay a 26-cents dividend for shareholders of record on June 30. Given market conditions, we’re adjusting our recommendation. HOLD
KraneShares Global Carbon ETF (KRBN)
The carbon trading focused ETF is also in a range and we’re about where we started. Nothing has occurred to change our belief shares should improve on carbon emissions programs, so we are maintaining our recommendation. Our sell-stop is near 32.75. BUY
Trex (TREX)
The long-term uptrend remains intact for the recycled-content decking maker. Shares haven’t made much direction up or down this week so our recommendation stays the same. We can buy here and put a sell-stop near 87, or 92 if you’re more cautious. BUY
The next Sector Xpress Greentech Advisor issue will be published on July 7, 2021.
Cabot Wealth Network
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