There has been a huge rise in SPACs recently. In 2020, there were 248 SPACS that IPO-ed as compared to 59 SPAC that IPO-ed in 2019. Examples of companies that went public through SPACs are Hyllion (HYLN), Lemonade (LMND), Virgin Galactic (SPCE) and….. Nikola (NKLA). These companies (except Nikola) had very good business models and had investors very eager to invest before IPO. This generates a lot of hype during the merger phase and causes stock price to rally.
What are SPACs (Special Purpose Acquisition Companies)?
SPACs are “blank check” companies that raise capital to acquire existing (not necessarily) small companies.
Most of the time, a SPAC has 2 years to acquire and announce a merger with a company that they have decided to acquire. If it did not make a deal within these 2 years, the SPAC is liquidated and the capital raised is returned to the investors. With this in mind, investors see SPACs as a stock that has high growth potential with lower risk as compared to typical high growth companies.
I own a high growth stock portfolio which consists of stocks that possess higher risk. These stocks can be greatly affected during market corrections and I have allocated a small percentage to SPACs. This serves as lower-risk play to hedge against any possible huge dip in the markets.
How to trade SPACs?
This is what I would do for a SPAC that I’ve decided to trade. I would first purchase the SPAC during pre-merger phase. Be patient and wait for a merger announcement. Once merger was announced, I will evaluate the to-be-acquired company and decide if I want to sell or hold. I will usually sell the SPAC before the merger date. And there you go, almost guaranteed profit. It’s very simple.
Is it that simple?
Yes, SPACs is simple and here’s why. All you need to do with SPACs is park your cash and wait. Once the news comes out, you sell for definite profit (99% of the time) and why do I say so? The reason is that SPACs have an actual minimum value of $10 (most case scenarios). This value is called the Net Asset Value (NAV). Capital is returned to investors at NAV when there was no acquisition deal made within the two years. You begin to realise that your risk is very minimal because your shares will always hold this $10/share value. For an example, you purchase a SPAC at $10.20/share. Your upside potential could be 200-300% but, with only 2% risk. Crazy right?
How do I begin investing in SPACs?
If you want to begin investing in SPACs, there are a few things that you need to look out for:
The management team behind the SPAC
The team that formed the SPAC can roughly tell which sector is being targeted for acquisition by the SPAC. Entities backing the SPAC and the big investors that are already in it, can give you big hints on which companies that can possibly merge with it.
The acquired company
Usually after merger news, a SPAC is sure to spike up. From there, your job now is to do research of the acquired company. You figure out if you believe in the business. Can you build conviction for it? Start deciding if you will sell or hold further and if you decide to hold, till when?
Stock price of the SPAC
This is the key factor in trading SPACs. If you have a low entry point, your profit is almost guaranteed. The question is by how much? If you decide to begin a position in a SPAC after merger announcement, your research done on the acquired company is absolutely vital here. You can evaluate how much higher the stock price can go by researching on the company’s business model. We ALL know after a merger happens, the price WILL dip after the IPO date. You could hold through the IPO and build a long-term position. Otherwise, just exit before merger date to avoid the IPO dip.
My personal opinion
SPACs can be a low risk risk investing/trading instrument that pays you for being patient. For those of you out there who have a small sum of money stored in your bank account and you feel like it’s such a waste of opportunity? Buy SPACs and hold! Worst case scenario? – your initial capital ($3000) would probably dip by a couple hundreds.. Best case scenario? – Initial capital ($3000) could double or triple. Your upside potential greatly outweighs your downside potential. That’s what I call a well-calculated risk!
It’s important to be updated on any SPACs news if you plan to trade them. It might also be useful to keep track on pending SPAC merger dates as IPO dips can be a good entry point if you plan to build a long position in the company.
SPACs on my watchlist and their possible acquisition targets
- Pershing Square Tontine Holdings (PSTH) – Bill Ackman’s SPAC. Stripe? Probably not. Bloomberg? Maybe.
- Foley Trasimene Acquisition Corp II (BFT) – Acquired target: Paysafe
- Fusion Acquisiton Corp (FUSE) – Most probably FINTECH sector.
- Artius Acquisition (AACQ) – Most probably FINTECH sector.
- Sports Entertainment (SEAH) – Sports betting/gaming sector.
(This article was originally posted on 21/12/2020)