Stock market is disconnected from reality: Billionaire investor Sam Zell

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Billionaire real estate investor Sam Zell told "Squawk Box" on Tuesday that the markets are disconnected from reality and actual valuations of companies. To see the full interview with Zell sign up for a free trial to CNBC Pro:

Billionaire investor Sam Zell told CNBC on Tuesday that some deals involving special purpose acquisition companies, or SPACs, remind him of the speculation in internet companies during the 1990s dot-com bubble.

In an interview on “Squawk Box,” Zell said he believes SPACs do offer positive benefits for investors who buy in at the creation of the so-called blank-check companies. However, the founder of Equity Group Investments said he’s worried about the fundamental business prospects for some companies that go public via a SPAC.

“If done well, it’s a very effective transaction. It’s one of the few times where the quote-unquote buyer has enormous power,” Zell said. “In other words, if you’re a buyer of an IPO SPAC, the worst thing that can happen is you get your money back in the cost to carry. The best thing that can happen is they make a very attractive deal and then you have a decision to make as to whether you want to play or not.”

But in some cases, Zell said, the SPAC’s target company is not that attractive. He did not mention any names. “In this speculative environment we’re talking, you’ve had a number of these SPACs done with making money going to the moon and I saw one the other day on electric charging stations” where the company did not project positive cash flow for years, Zell said. “This is rampant speculation again, very much like the dot-com boom.”

Investor enthusiasm for highly speculative internet stocks helped push the tech-heavy Nasdaq up more than 500% from 1995 until the bubble burst in March 2000.

Zell, who started Equity Group Investments more than 50 years ago, launched his own SPAC called Equity Distribution Acquisition Corp., which is described as “targeting opportunities to apply technological advancement within the industrial industry.” EGI’s portfolio over the years also branched out from real estate to industries including health care, logistics, manufacturing, transportation and media. Zell also chairs five NYSE-listed firms, including three real estate investment trusts.

Zell said his concern about action in the stock market extends to other recent developments, including the Reddit-fueled short squeeze in GameStop shares.

Retail traders piled into the heavily bet-against stock, prompting hedge funds and other bearish investors to try to minimize their losses by buying up shares at their current higher prices. Both groups of people buying GameStop’s stock helped cause a meteoric rise, with shares gaining 400% in a single week in late January.

The video-game retailer’s stock has plunged in February, ending Monday’s session at $60 per share. That’s down from its Jan. 28 intraday high of $483 apiece. In August, GameStop traded below $5.

“There’s no reality attached to that, and so it’s just pure speculation,” Zell said. “I think this is very negative for the stock market. It’s very negative for the capital-raising markets. It’s just creating and perpetuating just an incredible sense of disbelief and ‘can you top this?’”

The headline-grabbing GameStop saga turned parts of the equity market into a game of musical chairs, Zell said, in which “everybody knows there’s going to be one less chair when the music stops and 18-year-old mavens are betting they can get out before somebody else gets out.”

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