Special purpose acquisition companies have been under extreme pressure for a few weeks now as concerns have grown about the number of deals that have been filed and the increasing likelihood that many will not be able to complete their IPOs, let alone find a potential merger candidate. It seems like a classic bubble situation, where the market overacted with crazy valuations, and now the painful reality has set in.
The belief that SPACs are finished and are unlikely to offer any good opportunities is an example of the "hot hand" fallacy in behavioral economics. This fallacy is the belief that after a string of successes or failures, there will be even more of the same.
That may be true for some individual SPACs, but lumping all SPACs together as being the same is a major mistake. There will be many failures, but there will also be quite a few that will eventually shine. It may take some time for the market to sort out which SPACs are unfairly treated as "cold," but there is no doubt that there will be some winners.
One SPAC that I find quite compelling right now is Good Works Acquisition Corporation (GWAC) . GWAC has been punished like many other SPACs and has recently traded as low as its net asset value at $10. The stock bounced back last week, but at its current price, it has less than a 10% downside to the $10 redemption price.
There are many other SPACs that look similar to this, but what is compelling here is that GWAC has already announced a definitive agreement to merge with Cipher Mining Technologies.
Cipher Mining is a subsidiary of Bitfury Top HoldCo B.V., which is a leading provider of bitcoin mining hardware and other blockchain software and services. As a stand-alone company, Cipher is positioned to be a leading bitcoin mining company. Two comparable bitcoin mining stocks are Riot Blockchain (RIOT) and Marathon Digital (MARA) , both of which have been leading stocks this year.
The fundamentals of Cipher Mining are comparable if not better than both RIOT and MARA, yet GWAC has seen little momentum due to negative sentiment and the "cold hand" thinking about SPACs in general.
What is most appealing about GWAC is that it offers the potential upside of bitcoin but with downside protection at the NAV at $10. If a holder does not want to hold the stock when the merger is eventually finalized, she can elect to redeem the shares for $10. At $10.75, that is a downside risk, or about 7%. To see the potential upside, both RIOT and MARA were trading 7% higher this morning alone due to strength in bitcoin.
Although downside risk is limited to $10 due to redemption rights, the bigger risk for many investors is that the stock may not do anything for weeks or months as it awaits better action in SPACs and some recognition of its own individual merits.
This sort of asymmetric risk pattern seems too good to be true for many investors, and they are convinced that SPACs much be doomed. They don't trust the idea of NAV and won't be convinced of the opportunity until there is a shift in price action.
I view a situation like this as a good place to park some money. If I see something I like better, I can sell and transfer the capital. In the meanwhile, I have the potential for some good upside with minimal downside.