We love our headlines. No one has time to read any longer. Few have time to decipher the news beyond a headline and those who write the headlines know this. Sometimes the headlines are written to get you to click and sometimes they are written to get you to act. Unfortunately, if you aren't familiar with the company or the story behind the headlines, sometimes they will get you to make a big mistake.
That's how I see the news out of Nikola (NKLA) Monday after the bell. Here's a sample:
Nikola Files to Offer Up to 77.28M Shares for Holders
There is absolutely nothing wrong with this headline. It's accurate and to the point. The problem came in the immediate interpretation of this headline, especially on Twitter (TWTR) . I was so disappointed to see many folks who I follow and consider strong traders and professionals relay this headline in a manner that was misleading. In some cases, I'd say inaccurate.
The immediate "hot" take was Nikola knew their CEO would be on CNBC, so with that pump, they were dumping a bunch of shares to chumps on the market. Tweets about dilution and secondaries caught fire and the stock dropped 10% quickly. No one paid attention to the underlying details.
First, the headline reads "Up to" which means ultimately the number could be less.
Second, no one discussed the fact this filing including warrants already trading on the market. The warrants comprise roughly 30% of this filing, but you can buy and sell the warrants on the market right now. It's not exactly the same as trading the shares as the price is lower and some own the warrants because of the discount versus the conversion, but some warrant holders intend to be stockholders. It's unlikely, if exercised, all the warrants will be immediately converted and sold. Furthermore, unless there is a forced redemption, the warrants can be held for another half-decade. Nikola simply needs to file to allow for a cash exercise if a warrant holder chooses to do so.
Third, the approximate numbers behind this filing were disclosed in the company's 8-K filed back on June 3rd, when Nikola and VectoIQ merged. The filing is a result of the PIPE completed to close the deal. That created the cash portion of the merger.
So, what we had was a headline that looked potentially bearish. In reality, what we had was a headline disclosing Nikola registered the shares from the pre-merger PIPE and warrants as they already discussed would be done in the 8-K and is the exact same thing DraftKings (DKNG) (and other SPACs) do all the time after the merger is complete.
In short: this was standard operating procedure and pros should've known better.
On the plus side, it created a fantastic buying opportunity in the after hours for a quick trade. The stock bounced 13% after the initial drop while the warrants soared more than 30% from lows to highs after hours. Unfortunately, if you didn't know the story and logic behind the headline, then followed the ticker on Twitter, you were likely scared off from the trade.
There's nothing you can do now about what happened last night, but there are more SPACs that will be completing mergers soon, then filing a registration 10 business days or so after the merger. Get to know them after the merger, but before the filing, so you can properly interpret the headline and jump on an after hours opportunity if one develops.