3 Best SPAC Stocks to Buy Now

Posted on December 7, 2020 |

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SPAC stocks are hot but do you know the risks and how to analyze blank check companies?

SPAC stocks are the hottest investment of the year with one popular pick up 421% in less than a year! But there’s a reason they call these blank check companies and you MUST understand the risks before you invest.

In this video, I’ll explain special purpose acquisition companies, how they work and how to find the stocks to buy.

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Everyone is Investing in SPACs!

Nation, I give up! You’ve been asking for a video explaining SPAC stocks for months. I know it looks like I’ve been fighting it and you’ll see why in a bit but I want to make sure you have everything you need before jumping into what is probably the hottest investment of 2020.

Special Purpose Acquisition Companies are a shell company, and I don’t say that as a pejorative, that’s the technical term. A company with no business operations set up to buy another company.

And we’ll go more into how SPACs work but this isn’t a new concept. These things have been around for decades but just blew up as a concept this year raising over $40 billion in IPOs through October. That dwarves any other year. In fact, it’s almost more than the last three years’ combined!

So in this video, I want to give you a complete tutorial on SPAC investing, what they are, should you invest and how to find the best SPAC stocks to buy. Then I’ll reveal three blank check companies to watch.

I’m going to be using the special theme search tool on Stockcard to help us find SPAC stocks to research.

Follow our 2021 Bow Tie Nation portfolio on Stockcard. We’re just a few weeks into the portfolio and already beating the market by more than 18% with a 22% return overall! It’s free to follow the portfolio and you’ll get notifications whenever I buy or sell from the list, even before these videos come out.

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What are SPAC Stocks?

So we already looked at a very basic definition of these special purpose acquisition companies. These are companies with no business operations, set up usually by a Wall Street type called a sponsor. The company issues shares on the market to raise funds with the explicit mission that it will buy a company, usually within two years.

So when that happens, when the SPAC that has shares traded on the market acquires the other company, it changes its name and those shares become an investor interest in the acquired company.

A good example of this was Diamond Eagle Acquisition, ticker DEACU, raised $400 million in an IPO May 2019. The company issued shares at $10 each and then announced in December that it would acquire esports gaming company DraftKings, which was a private company with no shares on the market.

After investor approval of the deal, the shares of Diamond Eagle were converted into ownership of DraftKings and the ticker symbol was changed to DKNG…and the rest is more than history, it’s a 421% return in less than a year.

Other recent SPAC acquisitions include Nikola Motor for $3.3 billion and Virgin Galactic in a $1.5 billion deal by SPAC Social Capital.

How do SPAC Stocks Work?

Now before you start getting dollar signs in your eyes and think every SPAC stock is going to produce 400% returns, they haven’t really lived up to the hype in years past. Bloomberg data shows that SPAC acquisitions over the past decade have resulted in a total return of just 10% on average…that’s against a return of 203% for stocks in the S&P 500.

The money is out there but I want to show you how these work first, some pros and cons to SPAC investing, and then how to find the best SPAC stocks.

In a traditional IPO, so if a startup company wants to raise money for growth and list shares for public investors, then it works with an investment bank to value the company and promote the shares to institutional investors. The process of auditing and underwriting can take at least four to six months and there’s no guarantee it will be able to IPO…remember WeWork?

Along with that time commitment, a traditional IPO brings an immense amount of scrutiny on the company by regulators and investors.

To avoid that and shorten the process, the market invented the Special Purpose Acquisition Company. It’s basically a backdoor to listing your shares on the market and a guarantee that you’ll raise money. The sponsor, remember that’s who creates the SPAC company, is raising money for an unnamed acquisition in the future. In most of these, you won’t know what company it plans on acquiring for months or even more than a year after the SPAC sells shares.

Since the SPAC is already listed, it just converts its shares into that of the acquired company. There’s limited regulator oversight and investors really don’t have much say in it.

In exchange for a quicker and easier way to market, fees are much higher and a few investors win out over others.

Fees in a traditional IPO are usually 5% to 7% to the investment bankers and underwriters. Fees in a SPAC deal are generally that much plus 20% of the shares go free to the sponsor in what’s called The Promote…which always sounded to me like a bad episode of Jersey Shore!

Combine the fees and the Promote with the fact that some private investors get in on the deal at lower fees in what’s called the PIPE…and an acquired company has to do really well for retail investors to make money on these.

How to Analyze SPAC Stocks

Nation, when it comes down to it, these are called blank check companies for a reason. I’ll show you how to analyze these stocks once they announce that target company but until that point, you have to have that faith in the sponsor, in their investing expertise, that you’re willing to write them a check for shares of that SPAC, without knowing ultimately what you’re investing in.

None of this is to say you shouldn’t invest in SPAC stocks. Obviously you can make money, but you need to know how to find the legit companies and how to analyze the opportunities!

That explosion in popularity has brought a lot of those marginal players out into the SPAC universe so it’s gotten harder to find the legitimate companies. Starting my list, I used the theme search feature on Stockcard. One of the best features here, I can just type in a theme like electric vehicle or SPAC here and the dropdown shows me these collections of stocks in the theme. And so I get a list of 229 SPAC stocks I can research further.

Now normally clicking through a stock, I can see all kinds of fundamentals and ratios…but that’s a problem for special purpose acquisition companies because…well because they have no fundamentals or ratios. These are non-operating companies with no assets, no sales and nothing to analyze.

What you can do is each one of these is going to include a link to the company’s website, so you can use that to research each and the sponsor information.

Researching SPAC stocks is really a two-step process. Before the company names the acquisition target, that company its going to buy, then all you can do is evaluate the sponsor.

For blank check companies started by people like Bill Ackman or bulge bracket banks like Goldman, it’s an easier decision. These private equity and hedge fund legends have decades of experience bringing companies to market, so it’s really just another form of that.

When you have to be a little more cautious is when the sponsor has less market experience like…oh, I don’t know Shaquille O’Neal. Yes, the former Laker legend joined with one of Martin Luther King Jr. son’s and three ex-Disney execs to raise $250 million for a blank check company called Forest Road Acquisition Corporation.

Now, I’m not saying first-timers or those outside of finance can’t be successful but just make sure you look at these carefully. Even for the names you know, I would make sure they’ve already been able to successfully navigate a few SPAC acquisitions in previous companies.

When an acquisition is named, then you can treat it like an early-stage investment. This is where I spent a lot of my time as an analyst, studying venture capital and pre-IPO deals. Here three things are going to be most important.

First is you want to take a hard look at the target company’s management team. You need a combination of that entrepreneurial spirit with the founders but also some savvy corporate folks in marketing, finance, all the roles that make a business successful but may not be the skills that come with a tech-startup whiz kid.

You also want to see a competitive advantage, something the company does that sets it apart from existing products and isn’t easily copied. Even better if there are barriers to entry into this industry that the company has already busted through.

Third here, you need a large addressable market. This means customer spending on that product category in the billions of dollars. Doesn’t have to be the global smartphone market of $715 billion but it needs to be large enough that it can support another market player with a billion-dollar valuation.

From there, there’s also some valuation techniques you can use to evaluate these kind of startup companies acquired by SPACs. This is a table I included in research for private clients during a funding round for Pinterest a year before it went public.

What you do is list out all the similar acquisitions you can find in that industry, preferably ones that happened within the last few years for comparison. You research the deal value and find revenue numbers for the acquired company. Here I also found the monthly users for each social platform since it’s an important metric for the industry.

Then you take that transaction value and divide it by your revenue and other data. For example, Microsoft paid $26.2 billion when it acquired LinkedIn in 2016. That was 8.1 times the $3.2 billion in sales LinkedIn had made the year before and about $61 for each of the platform’s 430 million users.

From here it’s just a matter of averaging out those multiples to get an estimate for the fair value on your acquisition target. Here you see I estimated a fair value of around $20 billion for Pinterest and ended up recommending the investment.

Do this right and you CAN get multiples of returns on your investments. I used this same kind of analysis when recommending shares of Pinterest here on the channel earlier this year, for a 240% return!

SPAC Stocks to Buy Now

Now that you know the basics behind these special purpose acquisition companies, I do want to highlight three that could be worth a look. Two of the three have yet to announce their acquisition target but the third is a little further along and the management for all three is on point.

First is Pershing Square Tontine Holdings, ticker PSTH, and this is Bill Ackman’s SPAC.

Ackman broke the previous record to raise over $4 billion in his July IPO. He hasn’t named a target yet but says he’s looking for a mature unicorn, those rare startups with over a billion-dollar valuation that already have a solid balance sheet, sales and long-term growth.

Again, not a lot to research here but Ackman has 28 years in investment management with 16 of that founding and leading his hedge fund Pershing Square.

Another SPAC with heavy-weight sponsors is Churchill Capital IV, ticker CCIV.

This one is Citigroup banker Michael Klein’s fourth SPAC with two prior ventures still searching for a target but a successful acquisition of Clarivate Analytics in 2019 cemented his status in the space.

The fourth SPAC raised $1.8 billion, about a fifth less than planned but still enough to find a lot of good targets. There’s been no hint at a target yet but his previous experience here has been in data analytics which is a strong theme to bet on.

Our third SPAC stock, Flying Eagle Acquisition, ticker FEAC, just recently named its acquisition target.

The company raised $690 million earlier this year and is the sixth SPAC for Harry Sloan and Jeff Sagansky. These are the same sponsors that turned Diamond Eagle into shares of DraftKings…so yeah.

The company announced September that it would be acquiring mobile games platform Skillz for a valuation of $3.5 billion, about 6.3-times projected 2022 revenue. Keeping in the esports theme, Skillz powers tournaments and is expected to post $225 million in revenue this year on 88% growth.