BERKO: SPACs Offer More Risk Than Return

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Dear Mr. Berko: I’m close to retirement and my $400,000 IRA didn’t do well under my previous broker. Over the last 11 years, it’s averaged 7.23%. I asked him to be more aggressive, and it’s just not his style. So I moved to another firm, using a broker I’ve known for 20 years who told me he’s had good results with blank check companies or special purpose acquisition companies. He wants me to invest 25 percent of my IRA in them so he can “cherry pick” the issues. My wife is against it, but I’m convinced this broker’s smart, and in the past six years, he says, he has earned a 16.7% return. What do you think?

Also, last December I bought 300 shares of Elanco Animal Health at $30.50, and in a strong market it’s only $32. I’m thinking of selling, but my wife says we should buy 300 more shares. Your advice would be appreciated. — L.B., Cleveland

Dear L.B.: Your wife’s a smart lady and certainly smarter than you. I don’t believe the story about 16.7% return. This brokster sounds like the type of guy who breaks into funeral homes at night to collect body parts. Listen to your lady, Larry!

There are very fine investments, and there are many OK investments. There are very bad investments, and there are investments that are absurd, stupid and brainless. They’re called blank check companies or special purpose acquisition companies (SPACs), and I wouldn’t go near one with a sound wave. They were popular before the financial crisis, and the concept’s now enjoying a successful comeback.

These dreadfully speculative investments are sold only to slow-witted, dippy investors who’re still riding turnip trucks. Because SPACs are enjoying enormous popularity, they’ve raised $16 billion in new money since 2010, thanks to sundry odious broksters who’d steal pennies off their dead mother’s eyes. On average, SPAC IPOs raised about $254 million each, held in escrow till a deal is done. These companies have neither assets nor operating history and are basically blind bets (therefore, “blank check”) based upon a management team’s ability to use the escrow funds to make profitable deals.

It’s customary for SPACs to price their IPOs at $10 a share, which is convertible into the target company’s shares, usually on a share-for-share basis. If the funds are not spent within a year, the shareholder can request his money back. In some instances, the shareholder can request a refund if he doesn’t like the targeted company.

Most SPACs have underperformed the market for years, and many still trade below $10. There are 110 SPACs trading on NASDAQ and seven on the NYSE, however, most investors are not happy campers, as 70% of them trade below their IPO price.

Elanco Animal Health (ELAN-$31), spun off by Lilly in September of 2018, is the fourth-largest animal health care company in the world that provides products for companion and food animals. ELAN believes 2019 will produce revenues of $3.2 billion and earn $1.10 a share. And if management gets its ducklings in order, 2020 could record $3.4 billion with earnings of $1.30 a share.

ELAN sells parasiticide products, pain therapies, vaccines, enzymes, antibiotics, a range of food products and arthritis, heart and dermatology applications. Excellent management tripled revenues in the last nine years. ELAN has a big pipeline, with 36 new products to be launched by 2022.

Argus has a good report on ELAN, believing management can produce a five-year earnings growth rate of 12 percent! Some think that’s too conservative because most Americans would forgo a new tattoo to pay a vet’s bill. Argus has a $37 target this year, suggesting a 17% growth rate from the current price. The shares haven’t performed well since the spin-off, but some growing pains are expected as a stand-alone company.

(Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected].)