What You Need To Know This Week — June 13th, 2020
What You Need To Know This Week
A weekly recap to keep you informed on the most important events this week impacting markets, business, tech and the global economy.
AMATEUR INVESTORS PILE INTO STOCK OF BANKRUPT COMPANIES AS SHARE PRICES SKYROCKET
As society slowly recovers from the coronavirus pandemic, perhaps combined with the boredom that has accompanied the lock-down, investor risk sentiment has exploded as unsophisticated retail speculators have flooded the market. Seeking to maximize risk and attracted by the volatility, these speculators have focused on buying stocks of bankrupt companies, including Hertz and Whiting Petroleum. In a move referred to by some as “the most absurd moment in the history of capital markets”, bankrupt vehicle rental company Hertz is capitalizing on recent speculative interest in its stock by proposing to issue up to $1 billion in new shares which would be used to pay off creditors and fund bankruptcy proceedings. Shares of bankrupt companies are typically worthless, except for in the rare instance in which the debt is fully repaid and money is left over for shareholders. The speculators “playing” in shares of bankrupt companies are highly likely to be entirely wiped out.
AMSTERDAM-BASED FOOD DELIVERY COMPANY JUST EAT TAKEAWAY ANNOUNCES ACQUISITION OF GRUBHUB FOR $7.3 BILLION
Consolidation in the food delivery sector is heating up as Amsterdam-based Just East Takeaway announced a $7.3 billion all-share deal for Chicago-based GrubHub. The merger will create the world’s largest food delivery company outside of China. Much needed consolidation in the sector is finally occurring after food delivery companies suffered ongoing losses amidst an intensely competitive environment. The Just Eat Takeaway deal was unexpected, as media had previously reported that Uber was close to acquiring GrubHub until it abandoned the initiative given anti-trust concerns. GrubHub shares rose over 5% on the news of the deal.
ELECTRIC VEHICLE MAKER NIKOLA MOTORS CLOSED ITS GO-PUBLIC TRANSACTION WITH A SPAC AND ITS STOCK SURGED
One week into its life as a publicly traded company on the Nasdaq, electric vehicle maker Nikola now boasts a market capitalization of $22 billion, not far behind that of Ford. One major difference is that Nikola has no revenue. Its stock debuted on the Nasdaq last week following a reverse merger with a blank-cheque company headed by a former General Motors executive. In a sign of the market’s infatuation with profitless story stocks, Nikola’s stock is up about 500% since the RTO was announced in February.
SHOPPING MALL COMPANY SIMON SUES TO TRY TO WRIGGLE OUT OF ITS ACQUISITION OF TAUBMAN
In another unfortunate example of buyer’s remorse, mall-owner Simon Property Group announced that it was attempting to terminate its friendly $3.6 billion acquisition of Taubman Centers. The initial deal was announced on February 10th, after the coronavirus was already wreaking havoc in Asia but had yet to affect the United States. Simon is claiming a material adverse effect has occurred, of which Taubman disputes, therefore, the parties are heading to litigation. Taubman had been forced to close down all of its U.S.-based properties during the pandemic, however, 92% of its malls have reopened for business. Simon’s cold-feet happened just as the American economy was recovering, an odd time to renege on a deal. Taubman responded by indicating it will force Simon to complete the transaction — or pay damages. Nonetheless, I believe the most likely scenario is a negotiated price cut on the deal.
Notable Insights, Articles, Podcasts, and Tweets
Listen to the co-founder and chief investment strategist of GMO, Jeremy Grantham, discuss his near-term outlook on investing during the pandemic along with longer term opportunities on the Invest Like the Best podcast.
Hedge fund manager Bill Ackman is expected to launch a special purpose acquisition company that could raise more than $1 billion, which would make it the largest SPAC in history.
In the first quarter of this year, small cap value stocks suffered the worst performance in their 94-year history, tumbling -41.5% through the end of March. After bouts of underperformance, historically, small cap value stocks went on to outperform dramatically. “If history repeats, there is the possibility of big profits ahead in small value stocks.”
The great Guyana Goldfields bidding war has ended. The acquiror winning the auction was China’s Zijin Mining, who won the process with a $1.85 per share, all-cash offer valuing the company at $323 million. Zijin has been acquisitive as of late, closing the $1.4 billion acquisition of TSX-listed Continental Gold in March.
U.K.-based AstraZeneca, with a $140 billion market cap, has approached rival drugmaker Gilead Sciences, with a $100 billion market cap, regarding a potential merger last month. However, deal talks have cooled since.
Goldman Sachs’ commodities trading desk earned over $1 billion in revenue in the first quarter. The profits were primarily generated from the volatility in oil prices, as the trading desk was positioned for a dramatic fall in prices.
The U.S. Federal Reserve’s Chairman Jay Powell delivered a dovish message to the market by indicating the central bank would not begin to hike interest rates until at least the end of 2022. The Fed expects that low inflation and high unemployment will persist for a number of years, and therefore the economy will continue to rely on record monetary stimulus. We are in perhaps the easiest money environment on record. No wonder both gold and bitcoin are up double-digits this year.
The tremendous growth of the CLO market over the past decade is being compared to the tremendous growth, and subsequent collapse, of the CDO market in the previous decade. Some think that at some point we will start to see AAA-rated CLOs failing. This would put banks at risk of collapse.
With most professional sports being sidelined due to the pandemic, the UFC is perhaps the only game in town. A bettor placed a $1 million wager on the 6-to-1 favourite, champion Amanda Nunes, to win at last Saturday’s event. It turned out to be a good bet as the champion won in dominant fashion.
Collapsed Canadian cryptocurrency exchange QuadrigaCX was run like a ponzi scheme by its founder, Gerald Cotten. According to the OSC, Mr. Cotten used more than $100 million of client assets to cover speculative trading losses. In addition, he also used clients assets to fund a lavish lifestyle, travelling frequently and acquiring assets including a Tesla, a Lexus, a luxury yacht, a plane and properties.
Internet celebrity and Barstool Sports founder Dave Portnoy has turned to day-trading stocks in the absence of sports. Mr. Portnoy, perhaps encouraged by his prescient bets on beaten down cyclical stocks such as airlines, posed the question, “the people on the internet are debating who is the better investor right now, myself or Warren Buffett? It’s no debate. I killed him. He’s dead.” What an interesting time in the market.
What to make of Shopify, Canada’s largest company by market value? In my opinion, it is “certainly a story stock. It captures the mindset of investors,” which helps to push the share price up without any grounding in reality. Nonetheless, it is still a great company run by a visionary CEO.
Airlines are now pushing back on government travel restrictions. Air Canada Chief Executive Officer Calin Rovinescu stated that the Canadian Government should loosen travel restrictions to “enable us to do some reasonable amounts of business.” Evidence continues to show that society is ready to move past the coronavirus and its time to reopen the economy.
Grocery delivery company Instacart raised $225 million in funding at a nearly $14 billion valuation. The financing round was led by DST Global and General Catalyst.
