SPAC Attack! (Part 2)
Yesterday, Jonas Elmerraji told you all about SPACs — what they are, how they function and the biggest on the market right now.
If you didn’t see that yesterday, click here to read it now.
SPACs have been around since the ’80s.
But it’s only in the past couple months that they’ve really taken off.
The question then is why are they so hot right now?
Today I plan to answer that…
Plus, I’ll show you how you can become your own SPAC investor.
The Hottest Investments on the Market
This past summer had the perfect environment for SPACs to take off.
There were several factors that contributed to their rise to popularity.
First off, we needed someone to test out the concept and show its success, and be the spark to ignite the flame.
Fortunately, one of the most famous entrepreneurs of all time, Richard Branson, stepped up to the plate in July 2019.
Virgin Galactic (NYSE: SPCE), his developing space tourism company, announced it would use a SPAC to IPO.
As we mentioned yesterday, the stock has done astoundingly well.
Jump forward to 2020 and you get the next piece of the puzzle.
The markets from March until most recently have been incredibly bullish.
This meant that investors had a lot of extra liquidity to throw around at smaller, more explosive investments.
SPACs offered them a perfect way to do this.
A lot of companies as well have been hesitant to go the normal IPO route to list. Many have recently had success using alternative methods. But most recently in the past year, SPACs have dominated the conversation.
How to Use SPACs to Your Advantage
With all of this in mind, the question remains: How do you sort the good SPACs from the bad ones?
There are really two major things that you should look for when you’re evaluating a SPAC: who’s the SPAC manager, and what’s the company.
First is the SPAC managers themselves. Look at what they’ve done in the past. Remember, the SPAC won’t have a history, but those that run it should have some sort of record that you can look up. See if they have a good track record or does everything they touch turn out to be a flop?
There are a lot of red flags out there that you can spot if you use your head as well. Ask yourself, what are they going to get out of this deal, how is it structured and is there anything about the SPAC that feels off?
Next, if they have targeted a company to merge with, you want to look at that company.
Base this on how you would invest in any stock out there. If you’re more aggressive, look for hot tech startups that have new, innovative ideas. If you want to play it safer, there are always solid, well-vetted private companies that can use SPACs to get onto the markets.
Look at Utz Brands Inc. (NYSE: UTZ), for instance.
Utz has been around for nearly 100 years and just decided to go public via a SPAC this past summer.
Utz is the fourth-largest distributor of salty snacks in America and has a solid foothold in the eastern U.S. Nobody’s questioning whether Utz is a real business.
If you aren’t sure how to evaluate SPACs or need to get more information about the company, I would suggest talking to your broker or financial adviser directly.
A lot of times, they are able to give further analysis on the SPAC itself and know what to look for when evaluating a company.
Tomorrow, my colleague Robert Williams will wrap up the last day of SPAC week.
He has a fresh take on the future of SPACs and what it could mean for your portfolio.
To a bright future,