I have been inspired by Value and Opportunities “All German Shares” segment, where they week by week work through every share listed in Germany. I have always believed the systematic analysis of opportunities can lead to some pretty spectacular results.
However, to pragmatically find opportunities in a mostly efficient (and mostly overpriced) market, we need to focus where there are forced sellers. This can be done by looking at spin off shares, credit downgrades, or a host of other things. One easy filter to look at here is stocks that have taken a massive hit over the last month.
So with all that said, this month had a couple interesting stocks, and one interesting low-probability, long-vol situation that I actually took a position in.
SPAQ – A SPAC that has merged with Fisker, and EV company
This is an interesting situation. SPAQ is a SPAC, who has agreed to acquire Fisker, an electric vehicle company. The combination will give Fisker $1.04B in cash, with 294M shares total. This gives each share a cash value of ~$3.50. Let us calculate this as the downside scenario.
So let us look at the two upsides, first with a valuation approach, and then with a comp approach (a.k.a. mania approach). Henry Fisker has already successfully launched an EV before, the Fisker Karma. The concept was announced in 2008. As a car guy growing up, I remember these cars are insanely cool and super sexy. Even Top Gear loved them. He also was responsible for the other, arguably, two sexiest cars in history: the Aston Martin DB9, and V8 vantage.
Fisker had an assembly contract signed in November ‘08, with production scheduled for mid-2010. The first ~10% of sales landed in middle of 2011, with the next ~90% in 2012.
Today, they already have ~$1.6B in orders. Based on the Karma’s 1,300 orders placed in 09, to the 2,000 total deliveries, let us assume the $1.6B in orders translates into $2.5B in final deliveries in three years (to keep on the Karma’s timetable). If we use Tesla’s median three year trailing revenue multiple, that could give SPAQ an EV of $3.6B, and a share price of ~$12.50 per share
If we use Nicola as a basis for the other valuations, there are yet again a couple ways to do it. Their market cap before the fraud allegations came out against them, and today, was/is ~$15B and $7.5B respectively. This is for a company with no current revenues, no solidified plans to make revenues, and no experience in the EV market. If we just translate those market caps over to SPAQ we see an implied share price of $51 and $25.5 per share respectively. Fisker, however, is actually forecasting just over double the sales Nikola is. So under the most insane and manic driven conditions, there are comps that could suggest a price per share of $50 – $100.
Do I think the company is actually worth that? No. I think the EV market is a strong one, and there is a reason to believe the stock is worth slightly over $10 per share. However, there is a mania for SPACs and EV companies at the moment, and with even a 5% chance this company hits the $50 per share (with 50/50 odds given to 12.5 and 3.5), the EV is a 10% increase over today’s share price.
So I guess the best question to ask is how likely is a manic pop at the moment? Well as far as I can tell, all the EV companies listed on the market at the moment are doing really well. TESLA is trading at 813X earnings, NIKOLA and HYLIIO both have market caps over $3B despite no earnings what so ever, and NIO (which I have never heard of before today) currently has a market cap of $45B.
While I hate to try to predict manic movements in the market, I think there is a legitimate chance this stock will follow a similar path. Yet at the moment, the price isn’t including it at all. What’s even weirder is the option chains.
If we assume a binomial model with either a $0 or $50 value, the market is pricing in less than a 1.5% chance of that happening by Dec 18th, and less than a .5% chance of that happening by Nov 20th. If we go with the more conservative number of $25, they’re still pricing less than a 2% 1.5% at some strikes in November.
In my mind this seems like an interesting bet- a postivie EV lottery ticket. Kelly is spitting out a ~1.5% number, so I’ll be more conservative than that and only put a little bit in. I actually pulled the trigger here and put a very small position in some $15 and $20 Nov calls.
SSL – South African oil and Gas Company
Sasol (SSL) is an integrated equity and chemical company based in South Africa. The stock’s value has slowly declined, dropping ~50% since it’s post COVID high, and 75% from 52-week highs.
The company looks somewhat undervalued. CFE yield is ~50%, dividend yield is 15% – 20%, and equity to book value looks like it’s ~.3. They announced cost overruns at a US investment, as well as a disinvestment recently, but it’s hard to pin exactly what is driving down prices.
This is an interesting stock, but the company seems to complicated to get into here. I’ll keep looking at it, and if I find something interesting I’ll write about it elsewhere.
NGL – Oil and gas upstream company
NGL is a diversified midstream natural gas player. The stock took a 15% hit on the news that they were cutting equity distributions by 50%. They dividend yield has since corrected back to 15%.
Even with depressed oil and natural gas prices it looks the company is doing okay, potentially making the stock a cheap option on oil. But it is too large of a lift to dive into it in this post. I will also follow up here if I find anything interesting.
LLNW – US Software Company
Company owns and operates a content delivery network. The price drop is due to a miss in earnings and a decrease in YE guidance. There are a couple articles (see here, here, and here) thinking the stock is currently undervalued, as they expect PlayStation to be a new massive customer coming in 2021, and that the drop in guidance was due to a convert issuance.
That being said, it still looks as though they are fully valued, management hasn’t bought the dip, and I do not know enough about the space to feel comfortable getting involved.
SAP – German Software Company
What catches my eye here is that the day the company dropped 22% based on cut revenue forecast, management is out buying more shares. The Chairman bought ~$250M of shares, while the CEO and CFO bought ~$300K.
That being said, looks like the company is still overvalued, with FCF of ~$2 per share, and a share price ~$100. I’ll hold off on this one for now, but keep an eye on it as it develops further.
HYLN – US EV Truck Company
Overpriced EV manufacturer with no revenues. Already fully valued with extremely high vol, and susceptible to short squeeze. Not an attractive long or short. Next.
WKHS – US EV Van Company
Overpriced EV manufacturer with no revenues. Already fully valued with extremely high vol, and susceptible to short squeeze. Not an attractive long or short. Next.
DKNG – Online gambling
Draft Kings is the online fantasy sports gambling company. I honestly think there is a strong path forward for this company. Unfortunately, its cash burning, and fully valued. It’s hard to believe a $300M revenue company can have a market cap of $14B. Next.
DNK – Chinese Real Estate Service Company
DNK is a small cap Chinese company. I am wary of the risk in small cap Chinese companies. Next.
BQ – Chinese retail
I always avoid long situations in Chinese small cap companies.
Other biotech
I don’t know a whole lot about Biotech companies, but the following tickers also saw a >30% drop this past month:
OPT – AUS biotech
GOSS – US biotech
MESO – AUS biotech
ARQT – US biotech
BCLI – US biotech
SRNE – US biotech
ICPT – US biotech
ADAP – UK biotech
