Over the last few years, we have witnessed the creation a whole new playground for value investors, distressed securities specialists, and—more recently—private equity funds.
I’m talking about SPACs. These special purpose acquisition companies (SPACs) were all the rage in 2020 and 2021. Everyone touted them as pre-IPO shares, and wild-eyed speculators engorged with meme stock profits piled into them. They were betting on announced combinations with companies with stardust in their eyes and several zeros in their bank account.
That didn’t work out well for investors. Today, most SPACs, whether new or old, are deep in the red. Most of them deserve it.
But this SPAC “orphan” is a screaming buy right now…
During the heyday of SPACs over the last two years, we saw the creation of SPACs aimed at electric vehicles, miracle drugs, commercial space flight, quantum computing, and just about anything and everything else underwriters and operators could dream of selling to the investing public.
Because of a loose regulatory environment, some of the SPACs’ revenue and profit calculations were a tad aggressive.
Those who understood that SPAC trading is an arbitrage game played it the right way and made an enormous amount of money selling shares and warrants back to speculators who dreamed of huge gains in short time periods.
Now, retail investors can rarely buy shares in a SPAC right at the IPO because the fixed-income arbitrage shops and private equity firms take all the shares. They either redeem the shares for a small profit or sell the pop on a well-received business combination announcement.
But arbitrage shops like Saba Capital, Bulldog Investors, and Guggenheim Capital hoovered in cash during the SPAC IPO boom. Almost all of them are still actively trading SPAC arbitrage. Private equity firms like Apollo (APO), Blackstone (BX), and KKR (KKR) also figured out they could play the SPAC arbitrage game and add excess returns to their portfolios as well.
Most deals included warrants along with shares. The arbitrage players either sold them to increase the fixed income-like return or redeemed the stock and kept the warrants with a zero-cost basis.
We will do an in-depth review of SPAC arbitrage at some other point in time. The most important thing to understand today is that once the SPAC merges with its target and the business combination closes, the underwriters, the arbitrage shops, and most of the private equity players are done with the SPAC.
Wall Street has pocketed its gains and walked away, singing a happy song. Individual investors who bet on hopes and dreams, however, did not fare as well.
Many of these businesses had no business becoming public companies. Some had good ideas but were years away from having a viable business. Others were just garbage companies exploiting the SPAC craze to line their pockets.
The price of many SPACs headed south quicker than a hedge fund manager in December. And when the boom ended, any company that had ever gone public as a SPAC was sold aggressively, with little consideration for the underlying business. Even SPACs from several years back saw selling pressure that continues today.
There are hundreds of former SPACS that are now publicly traded companies. Most are garbage.
But some are not, and they have the potential to trade at several times their current stock price. Indeed, there are some excellent businesses worth investigating in the junk pile of former SPAC companies.
One former SPAC that’s a very good business with the potential to be a great business is Daseke (DSKE). This was an older SPAC, having completed its business combination back in 2017, but the stock has fallen in with all the other SPAC orphans. It doesn’t help that the stock has very little Wall Street coverage, and is in the trucking business, which has struggled with supply chain concerns and spiraling fuel costs.
A deeper dive, however, shows that Daseke is a unique high-return business. It was founded back in 2008 by an entrepreneur named Don Daseke, who had already built and sold Walden Residential Properties—a REIT he eventually took public and then sold for $1.7 billion. In addition, he had been the founding chairman of Sage Telecom, a telecommunications company serving rural America that was eventually acquired by a hedge fund.
Daseke had no intention of going into the trucking business. However, a friend who was an investment banker talked him into taking a look at Smoky Point Distributing, a flatbed and specialty trucking company in Washington State, and Daseke quickly realized that this was a good business that generated a lot of cash. Further investigation showed that there was not, at the time, a national flatbed company. This industry was ripe for consolidation.
With that, the man who came to be called the accidental trucker was off and running. Today, Daseke is a collection of 13 companies that share a fleet of approximately 6,000 tractors and 13,000 flatbed and specialized trailers, as well as a million-plus square feet of industrial warehousing space. Each company maintains its own management, client lists, and business practices. They draw on the corporate resources as needed to meet demand.
Trucking is a tough business right now, but Daseke is hauling specialty cargo that includes things like windmill turbine blades for the renewable energy industry, large contracting equipment for infrastructure repair, ammo and weapons for the military, and other unique loads. Even the White House Christmas Tree has been delivered by Daseke trucks on several occasions.
Despite the current challenging operating environment, Daseke is profitable and expects to remain so. In the most recent quarter, it raised its revenue estimates for the full year 2022.
The company says that so far this year, the free cash flow yield of the business is 32%, based on the company’s market capitalization. The return on equity is expected to be over 20% again this year.
Daseke is trading at less than eight times its earnings and has a price-to-sales ratio of just .23 right now. The stock is too cheap, and I expect to see it back in double digits or more a few years from now.
Daseke is a chance to make the current market volatility work for you. Buy a little of this SPAC orphan here and there, every time the market sells off. The idea is to slowly build a position that grows to be large that when the rate hike cycle is over (and the inevitable recession is over) the recovery in the shares is large enough to make an enormous difference in your life.
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