SPACs Under Attack In Q4, Insiders Stepping Up

by: Dane Capital Management, LLC

While the market as a whole and small-caps, in particular, took a nosedive in 4Q, former SPACs were particularly hard and seemingly, indiscriminately, hit.

We attribute this primarily to tax loss selling, fund redemptions, concerns about interest rates and a recession, and in cases, a lack of a strong institutional following, given SPAC heritage.

While we have observed several modest bounces among stocks, it would appear that there remains substantial potential upside given the magnitude of the unwind.

Our confidence is enhanced by fairly widespread insider buying.

The bear-market for small-cap stocks that began following all-time highs in August and went through December resulting in a 20%+ decline from highs for the Russell 2000 (IWM) has been widely reported. Former SPACs in this group appeared to have been particularly vulnerable, as many seemingly couldn't catch a bid for weeks. In what was not a very good year for most SPACs - Magnolia Oil & Gas (MGY), Waitr (WTRH), and WillScot (WSC) were notable exceptions (although they also got hit in 4Q) - but 4Q was particularly ugly.

Awful SPAC performance In fact, one could argue, it would be improbable to have had such a bad outcome simply throwing darts at a dartboard (covered with stock tickers).

Limbach's (LMB) decline, which we believe is far overdone, can be attributed to a 3rd quarter cost over-run which is tied to a single geography (the remainder of its business for 2018 is ahead of plan), and Alta-Mesa (AMR) and Rosehill (ROSE) are tied to the energy complex, but each saw their swoon well before oil completely plummeted. Nor have either remotely recovered despite oil's healthy bounce.

Daseke (DSKE) is particularly remarkable as its shares nosedived 54.1% during 4Q (see separate write-up: "Daseke: Down, But Not Out.") There was no earnings miss. There was no downward guidance. There was a single analyst downgrade, which we believe is misguided based primarily on far too low a free cash flow estimate for 2019 - despite handily exceeding this analyst's and the Street's 3Q numbers. Shares of comparable US Express (USX) declined 59.3% in 4Q, but they also experienced a sharp 3Q earnings miss, resulting in a 21.6% one-day decline in the stock.

Daseke Trucking Comps Daseke now trades at an extremely undemanding 4.4x 2019 EV/EBITDA, based on our estimate of $200mn of EBITDA.

Given this backdrop, it's noteworthy that many of the aforementioned companies had insider buys during 4Q.

Insider Buying SPACs Admittedly, this is not proof that shares will appreciate, but, certainly, it's a strong indicator that those who know best are believers in their company's prospects. We take particular note of Lazydays (LAZY) which saw over 3% of its market cap acquired by insiders in just over a one month period - Coliseum Capital is represented on the Lazydays Board (please see separate article: "Lazydays: A Self-Help Play With Significant Upside."

While Limbach didn't have an insider purchase during 4Q, on December 17th, the company issued a press release "Limbach Holdings Establishes Share Purchase Plan for Senior Management," under which CEO Charlie Bacon and another undisclosed member of senior management are to acquire shares via a 10b5-1 buy program. As of yet, no purchases have occurred based on publicly available filings, but we suspect they will occur in due time. If Limbach's Mid-Atlantic woes are behind them, then based on backlog, which is up, and higher margins on that backlog, the company should see EBITDA revert towards, and eventually above, levels anticipated in 2017. In such an event, the stock could be a multi-bagger.

Our belief in insider buys, particularly those at small cap companies is based in part on the work of University of Michigan Professor H. Nejat Seyhun and the analysis he did on every single trade over a 21-year time frame in his book Investment Intelligence from Insider Trading.

Investment Intelligence Copyright MIT Press

His findings were that the smaller the market cap the company, the more pronounced the relative outperformance versus the market, although, on average, across all caps, insider buys correlated to outperformance. He also found that in instances where there was no prior insider trading over the past year (i.e. (Infrastructure and Energy Alternatives (IEA)), the effect was even stronger.

We'd submit that James Baumgardner's 5000 share purchase of NRC Group Holdings (NRCG) probably has limited significance. But for readers unfamiliar with the NRC story, we'd point out that, while JF Lehman "sold" NRC Group from their 3rd fund to merge with Hennessy Capital Acquisition Corp. 3, they bought $50mn of merge-co from their 4th fund, making them (and their prior holding from fund 3) a 65% owner. That strikes us as significant alignment and a large insider buy. For more on NRC Group, please see our separate article "NRC Group: A Top Idea With 80%-100% Upside In 2019 In Uncertain Times" - which includes a recent deck of one of top ideas for the year.


As is often the case, the market and individual stocks overshoot to the upside and to the downside. With the broad fears in 4Q about China and trade wars, a potential recession, higher interest rates (will rates go up if a recession's coming?), oil price declines, government shutdowns, etc., etc., there were few places to hide. Little loved small-caps were the perfect whipping dogs for year-end, overdone, tax-loss selling. We suspect that some company-specific good news and buying by patient value investors will reinvigorate share prices of many of the aforementioned stocks. We are optimistic that some of last year's biggest losers can be this year's biggest winners.

Disclaimer: This article was provided for informational purposes only. Nothing contained herein should be construed as an offer, solicitation, or recommendation to buy or sell any investment or security, or to provide you with an investment strategy, mentioned herein. Nor is this intended to be relied upon as the basis for making any purchase, sale or investment decision regarding any security. Rather, this merely expresses Dane's opinion, which is based on information obtained from sources believed to be accurate and reliable and has included references where practical and available. However, such information is presented "as is," without warrant of any kind, whether express or implied. Dane makes no representation as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use should anything be taken as a recommendation for any security, portfolio of securities, or an investment strategy that may be suitable for you.

Dane Capital Management, LLC (including its members, partners, affiliates, employees, and/or consultants) (collectively, "Dane") along with its clients and/or investors may transact in the securities covered herein and may be long, short, or neutral at any time hereafter regardless of the initial recommendation. All expressions of opinion are subject to change without notice, and Dane does not undertake to update or supplement this report or any of the information contained herein. Dane is not a broker/dealer or investment advisor registered with the SEC, Financial Industry Regulatory Authority, Inc. ("FINRA") or with any state securities regulatory authority. Before making any investment decision, you should conduct thorough personal research and due diligence, including, but not limited to, the suitability of any transaction to your risk tolerance and investment objectives and you should consult your own tax, financial and legal experts as warranted.

Disclosure: I am/we are long AGFS, DSKE, LAZY, LMB, NRCG, WTRH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.