There is probably a lot of trash in the speculative boom currently taking hold of markets. But hidden amid the meme stocks, SPACs, and crypto coins could be some valuable businesses.
“Somewhere in the hundreds of SPACs and scores of meme stocks are some decent companies and potentially even a few huge opportunities,” DataTrek’s Nicholas Colas wrote in a note this week. “For example: Hertz, which was supposed to be a retail investor graveyard, actually exited bankruptcy with its equity value intact. The same exact thing happened with U-Haul about 20 years ago, by the way.”
While many of the assets used for speculation may have similar price spikes as viral interest or short interest affect people’s perceptions, most of these things are all pretty different, with different stories and long term possibilities.
Take Hertz. Last year, the company was bankrupt and shares were on a roller coaster — investors could try to double or triple their money in a day. But if an investor held on and didn’t sell shares out of boredom or when the stock stopped being compelling (Yahoo Finance traffic data showed interest and trading volume fell off in July 2020) they would be in a pretty good situation, returns-wise.
Hertz had fallen from a June 2020 peak of over $6 to well under a dollar during the months after interest waned and was delisted from the NYSE in 2020. But in May, it ended up being worth over $6 a share when the company emerged from bankruptcy via auction, rewarding shareholders who stayed.
The only thesis there would have been “this name-brand rental car company would get its mojo back when people start renting cars again,” not a huge jump.
‘Meme’ stocks and SPACs could have moonshot potential, even if tiny
On the SPAC boom, Colas mused that most will probably fail or at least “dramatically underperform,” but that “somewhere in this barrage of moonshots there will almost certainly be a few huge winners that leverage disruptive technology.”
According to a Reuters investigation, 100 SPACs, most of which began trading last year, gained just 2% from their first-traded prices, dramatically underperforming the S&P 500 index.
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But Colas has a reminder that there is an easy way to get exposure to any breakaway successes in the SPAC world — by simply getting involved in a broad equity portfolio like the S&P 500.
“If you own a diversified U.S. equity portfolio like the S&P 500, then SPACs and meme stocks are basically free call options,” Colas wrote. “Somewhere in that basket of oddball ideas could be the next Amazon or Apple, and you absolutely want to see those companies funded. At some point, the 1 percent of SPACs that actually work will end up in the S&P 500, driving future returns. And the 99 percent that fail will have cost you nothing.”
While you might not get the jaw-dropping ground-floor gains, a transformative company would have plenty of gains still to give an index after it’s added. Just look at Apple, Amazon, or even Tesla. If the company is a good one, it will do well, and even if you don’t get those ground-floor gains, not having the losers is a huge advantage.
This is key because you never know what’s going to happen. For a SPAC with a nebulous business, you can have the moon in your sights. The vaguer things are, the higher you can shoot. But for GameStop, AMC, and Hertz, we’re talking about a game store, a movie theater chain, and a car-rental company — hardly the next Apple. At least, you’d think. But not necessarily.
“There is always some level of optionality in any business, no matter how prosaic,” Colas told Yahoo Finance. “And that optionality increases in value when there is a ton of cash on the balance sheet because managements have more time to explore the options embedded in the price.”
In other words, when these meme stocks have a ton of cash, more than they’ve ever dreamed of, a lot more might be possible, even if it’s a long shot.
“Now, the options might not be worth much,” Colas added, “but they aren't worth zero until the cash is gone.”