A few weeks back, Pershing Square Tontine Holdings (NYSE:PSTH) stock was flying high. Sponsored by Billionaire investor Bill Ackman, it was one of the hottest SPAC (special purpose acquisition company) stocks out there. But, in recent weeks, shares have pulled back considerably from their highs (around $34 per share).
That’s no surprise. With news the company won’t lock down a merger partner this quarter, it’s understandable why investor interest has faded. In addition, investors have cooled down on their overheated enthusiasm for the SPAC investing trend. Yet, this recent weakness may be a sign it’s time to buy.
How so? At today’s prices (around $23.50 per share), downside is minimal, given that shares likely won’t move far below their $20 per share redemption price. In terms of upside, modest gains could be ahead, depending on its eventual merger target.
In short, the risk/return proposition is now in your favor. Granted, there’s no guarantee of stunning gains from here. But, as uncertainty hits the markets, this may be one of the better short-term opportunities out there.
PSTH Stock and Its Fading Hype
In my last article on Pershing Square Tontine, I took a bearish view on the stock. Namely, due to valuation. Investors, confident in Ackman’s abilities as a sponsor, and hyped about SPAC stocks in general, had bid up shares to a high premium relative to its net asset value.
This premium made little sense, Ackman’s investment talents notwithstanding. Some may have thought he was going to use this blank-check company to take a hot, privately-held tech company public. But, with Pershing’s criteria focused more on established privately-held companies, it was clear this wasn’t going to become the next Churchill Capital IV (NYSE:CCIV), the SPAC that’s taking EV startup Lucid Motors public.
But, now, that sharp premium has come down considerably. The potential for gains with PSTH stock now exceeds the risk of losses. How so? Shares could see additional pullback. But, it likely won’t be far below its $20 per share redemption value. A redemption will occur if the company fails to execute a business combination by July 22.
On the flipside, if the company announces a merger deal this year? Depending on the target, shares could see a nice pop. Maybe not a sudden move back to $30 per share. But, a rip back to $25-$30 per share may be attainable. Depending on its intended merger target. Even if it chooses not to buy the hottest “unicorn” out there, it may be enough to put more points into this stock.
Potential Merger Partners for This SPAC
Upside potential for PSTH stock may vary. It all depends on what company it eventually makes a deal to merge with (assuming it strikes a deal within the next 15 months). So, what are some potential targets for this blank-check company? Names that have floated around include SpaceX, Stripe, and even Bloomberg L.P.
InvestorPlace’s Tom Taulli recently named 7 other possible merger partners. His list includes established companies like home improvement chain Menards, and convenience store chain Wawa. But, although this SPAC has said it wasn’t prioritizing merging with an early stage company, Taulli named several that could be of interest to Ackman. These include business travel SaaS platform TripActions, and artificial intelligence company Scale AI.
My view? Its possible Ackman decides to follow the trends, and try to buy an early-stage company. But, I’m still assuming he’ll select a more established name. Especially given how his prior forays into SPAC investing played out.
As you may remember, in the early 2010s, Ackman was involved with a SPAC called Justice Holdings. Justice acquired Burger King, then merged with Tim Hortons, becoming fast food conglomerate Restaurant Brands International (NYSE:QSR). Using past as prelude, it seems very likely his second SPAC venture will result in taking a more “old economy” company public.
Yet, while this likely won’t rev up speculative fever for PSTH stock, it may be sufficient to fuel a small pop from today’s prices.
Falling Towards its Offering Price, Consider it a Buy
Admittedly, the upside potential for Pershing Square Tontine isn’t massive. At least, for now, as we’re still in the dark with regards to its possible merger target. We could see a brief pop after a deal announcement. But, it’s still debatable whether that’ll be sufficient to fuel a rebound back above $30 per share.
But, while you probably won’t get rich buying this stock, at today’s prices, you likely won’t lose your shirt. Shares could continue to sell-off from here. But, downside risk may be limited to not far below its $20 per share redemption price.
So, what’s the best move with this lower-risk, but lower possible return play? Given the uncertainty lingering over the markets overall, consider PSTH stock a worthwhile buy at or below today’s prices.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
View more information: https://investorplace.com/2021/03/psth-stock-cooling-spac-enthusiasm-makes-it-a-buy/