Nikola (NKLA) may have single handedly crushed the excitement around special purpose acquisition companies (SPACs) though the holidays. The excitement around the success of DraftKings (DKNG) and even Virgin Galatic (SPCE) has been pushed aside for the disaster that NKLA has become. Granted, there has been some strong speculation in the SPAC market, but Nikola's troubles come with a double hit to the electronic vehicle (EV) market. The disappointment around Tesla's (TSLA) Battery Day aren't helped matters much either.
In general, the high flying SPAC names of the late summer are now getting trashed today. In that hit, though, there may be opportunity. I'm spying a play on Graf Industrial (GRAF) via the company's warrants. The stock has fallen from $32 to $22 over the past 10 trading days as they approach their merger approval. During that time, the warrants (GRAF.WS) around the company have been hit hard as well.
There seems to be some confusion around the GRAF warrants as they aren't the typical one-for-one. Instead, these warrants permit a warrant holder to purchase 3/4 of a share at $11.50. In a recent company presentation, management explained it as such:
A person who holds four warrants can exercise them to buy three shares of stock at $11.50 each.
This exercise can be done 30-days post-merger in most cases. Given the current prices as I'm typing $5.00 for the warrant and $22.30 for the stock, here's how that plays out.
I buy 400 warrants for $5.00 each, so $2000 total. Once I can exercise, I can exchange 400 warrants to buy 300 shares at $11.50, so another $3450. That puts my total cost for the shares at $5450. But with the shares trading at $22.30, I can now sell those for $6690. That's a potential gain of $1240.
In short, it means the Graf warrants are trading at a fairly heavy discount. We saw big discounts in the Nikola warrants as well. While the Nikola stock may not be being well now, the discounted warrants worked out very well for holders through exercise. While GRAF warrants are trading around $5, there intrinsic value sits around $8.
Of course, the stock could drop. Currently, that breakeven against intrinsic value is approximately $18.25. Also, the shareholders could vote against the merger. In that case, the warrants would go to zero. Thus far, the merger has been well received and the company, Velodyne, which Graf is buying, offers a lot, so I don't see that happening. Still, it is a risk. Also, there are no options to hedge the potential downside of the stock, and the warrants likely can't be exercised until the end of October or early November, so there is time risk.
Taking all that into account, I believe owning the warrants around $5 offers a compelling risk-reward for a small portion of a portfolio. I've been a buyer at $5 or below. I've reached the max size of 8% in my trading account for GRAF and GRAF.WS, so I do not anticipate adding more now, but I do intend to hold until we begin to see that discount shrink.
