Stocks of companies even remotely linked to former U.S. President Donald Trump have been on fire, to say the least, as he moves closer to securing the GOP nomination for the 2024 presidential elections. Shares of Digital World Acquisition (DWAC), which has announced a merger with Trump Media and Technology Group (TMTG), had nearly tripled on a year-to-date basis through Tuesday's close - up 190% ahead of the New Hampshire primary results - with at least a section of the market betting on a second Trump presidency.
For the record, if Trump manages to win the 2024 elections, it would be only the second instance in modern history when an ex-President returns to the White House. Grover Cleveland, who served as the 22nd and 24th president of the United States, is the only other person to achieve that feat.
The “Trump Trade” of 2016 is Back
Keeping politics aside, DWAC and other Trump-linked stocks have seen a frenzied buying spree. Investors might recall a similar “Trump trade” that swept markets after his 2016 elections, as steel and aluminum stocks soared on hopes that his administration would put an end to dumping by foreign countries, especially China. The Trump administration did announce Section 232 tariffs on U.S. steel and aluminum imports and fulfilled that promise, even as their long-term impact is up for debate.
Trump Stocks Rise in Meme Stock Fashion
The rise in Trump-linked stocks can be compared to the meme stock mania that characterized COVID-era markets of 2020-2021. While DWAC is getting most of the attention, as it is merging with a Trump-owned company, some other related names have also rallied.
For instance, Rumble (RUM), which is partnered with TMTG and Truth Social, has gained nearly 74% over the last five days and is up 40% for the year. Shares of little-known Phunware Inc (PHUN), which designed the app for Trump’s 2020 campaign, are up 359% for the year.
As for Fannie Mae (FNMA) and Freddie Mac (FMCC), which were taken over by the U.S. government and now trade on the OTC market, both stocks have also soared, as Trump has previously talked about freeing these companies from conservatorship.
DWAC-TMTG Merger Has a Troubled History
Special purpose acquisition company (SPAC) mergers have been under scrutiny, as practically none of these are trading above their debut price post-merger. In fact, DWAC’s merger with TMTG, which is the parent company of Trump’s Truth Social platform, had been in the news for the wrong reasons prior to the current euphoria.
The merger has been postponed several times, and the companies now expect to complete the merger by March. Last year, the SEC charged DWAC “for making material misrepresentations in forms filed with the SEC.”
“The Commission finds that DWAC misled investors and the SEC by failing to disclose that it had formulated a plan to acquire and was pursuing the acquisition of TMTG prior to DWAC’s IPO,” said the SEC in its report. DWAC, however, agreed to a cease-and-desist order, and will have to pay an $18 million penalty in case the merger gets completed. However, the SEC hasn’t yet cleared the S-4 merger agreement.
Why Should Investors Steer Clear of DWAC?
While fundamentals can take a back seat in the short term, it would be prudent for investors to steer clear of DWAC stock, given the multiple risks. These include
- Uncertainty over merger: DWAC’s merger with TMTG is not a done deal yet, and if the merger does not go through, the stock’s value would only be the IPO price of $10.
- Unjustified valuations: According to Jay Ritter, a University of Florida finance professor who studies SPACs and IPOs, DWAC’s current stock price implies an $8 billion valuation for Truth Social. For context, Fidelity most recently valued X (formerly Twitter) at around $12.5 billion. Truth Social’s user base is a tiny fraction of X, and its revenues in the first nine months of 2022 were a mere $3.3 million with losses of $49 million. The company has also warned about its ability to continue as a “going concern” without a cash infusion.
- The utility of Truth Social: The basic premise behind the launch of Truth Social was the conservative angst (whether right or wrong) that mainstream social media platforms are biased against them. Now, with X taking a hard right turn under its new owner Elon Musk - a self-proclaimed “free speech absolutist”- I doubt the utility of platforms like Truth Social, which intended to channel those irked conservative users to its platform.
Overall, we have seen these meme trades play out in multiple other stocks - most recently with VinFast (VFS) - but generally, these things don’t end well. While DWAC stock could still rise from these levels amid euphoria over a Trump presidency, I would rather bet on Trump winning the 2024 elections rather than buy DWAC stock, whose price looks detached from fundamentals - even in light of today's sell-the-news drop after last night's primary win.
On the date of publication, Mohit Oberoi did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
