What are SPAC Stock & Should You Invest in 2021?
2020 was a crappy year for humanity. SPAC stocks was one of the only bright spots in 2020 and investors made generous returns. That trend seems to be moving forward into 2021. We are going to talk about what are SPAC stocks, what to look for in SPAC stocks, and what SPAC stocks to look for that will make you money in 2021 and beyond.
What are SPAC stocks?
SPAC is an acronym for Special Purpose Acquisition Company, SPAC for short.
A SPAC also know as a "blank check company" is a company on the stock exchange that has no commercial operation. They are formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring another existing (private) company & bringing it public. These stocks are speculative.
Examples of a SPAC merger:
Just recently there was a SPAC merger with a blank check company called Landcadia Holdings (LCA) with the purpose of merging with Golden Nugget Online Casino and is now trading under the stock symbol GNOG.
Landcadia Holdings was created so they can raise the money though an IPO and use those funds to acquire Golden Nugget Online Casino and bring it public.
Some of these SPACs are pre-determined like this, other SPACs are former and might not know the exact company they would like to acquire, but has an idea of what industry they want to get involved with.
Why Would Companies Do a Reverse SPAC Merger?
The reason private companies would rather do a SPAC merger, than a traditional IPO is because of the shorter process. Instead of half a year or longer wait and massive amount of filings with the SEC for an IPO, the process of a SPAC merger takes less time. The SPAC already did the hard part in raising the funds for the IPO.
Founders of these private companies also find it attractive because they can sell a higher percentage of their ownership in a reverse SPAC merger than they would with an initial public offering.
What to Look For in a SPAC?
As mentioned before, SPACs are speculative. You can't do any fundamental analysis because the company is not in commercial operation, so there are no financials to go over such as: revenues, earnings, net-income, etc.
Anybody can start a SPAC and ask for $10 a share, so you want to look at the management team behind it.
You have to pay attention to big names or solid management teams who have a track record of having successful mergers in the past. Or former CEOs, CFOs, or any position with a track record related to running a successful business.
Look for big names such as Bill Ackman or Chamath Palihapitiya. Ackman is currently apart of a SPAC called Pershing Square Tontine Holding (PSTH). The stock has risen just because he is running the management team of the blank check company.
Chamath Palihapitiya for example, has 3 successful SPAC mergers under his belt:
He took Virgin Galactic, Open Door Technologies, Clover Health, and is about to take SoFi public with his "blank check company" Social Capital Hedosophia Hldgs Corp VI (IPOE).
Wrap Up
Should you invest in SPAC stocks in 2021? The answer is yes. 2021 will continue to be the year of the SPAC. The key in making money with SPAC stocks is to find a SPAC stock with a solid team BEFORE the merger is complete. This is the case where you buy the rumor and sell the news.
This week I will post another blog post on my top 5 SPAC stocks I'm investing in 2021, so be on the look out.