Crashing SPACs Provide Some Attractive Buying Opportunities

Overall, 2020 marked a new high in the companies going public through the SPAC route. Nearly 230 SPAC IPOs raised $80 billion, which was more than the money raised through this route in the last 10 years. After starting 2021 on an even more bullish note, SPACs are now experiencing their moment of truth. Most of the SPACs have fallen significantly. What are the best SPACs to buy now?

SPACs became the preferred route in 2020 as many companies wanted to take advantage of the rising stock market quickly. Compared to traditional IPOs, SPACs are usually shorter and less expensive.

Most high-growth companies are backed by SPACs. Last year, SPACs and high-growth plays thrived amid the low-interest-rate environment and expectations of moderate inflation. However, things started changing in 2021. Treasury yields started to inch higher in February due to the stimulus, COVID-19 vaccination hopes, and a generally optimistic economic outlook. 

The shift caused investors to move from growth stocks to more value plays. Cathie Wood’s growth-oriented ARK Invest was one of the major casualties of this rotation. Value stocks usually see their earnings power increase as the economy recovers. Higher interest rates have a negative impact on the cash flows with a longer duration. Growth stocks usually fall in this category since a large part of their cash flows are out far in the future. By nature, SPACs are speculative. They are blank-check or shell companies that don't have any business. They form to help take another business public. Since many of the SPACs were looking for targets in the high-growth space, they were the ones that fell. 

Most of the SPACs got ahead of themselves. According to S3 Partners, the short interest in SPACs has jumped over 300 percent since last year. Many SPACs rose to lofty highs even before they made a target announcement. The rise in CCIV’s stock prior to the announcement of the merger with Lucid Motors is one of the prime examples of people moving on SPACs on pure rumor and speculation. The fear of missing out created a bubble in some SPAC valuations. Even the SEC issued a statement saying that it “is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it.”

Most of the SPACs have fallen significantly from their recent highs. An index of SPAC stocks operated by Indxx fell about 25 percent from mid-February to April 27. During the same period, Nasdaq remained almost flat. Through this correction, SPAC stock prices have come more in line with their fundamental value, which reflects their future prospects. Currently, the premium levels of most of these SPACs are the lowest in months. As with any other investment, there are SPACs that offer value and are hinged by strong sponsors and have gone through thorough due diligence. Then there are others, which cropped up to take advantage of the SPAC-craze and go public as soon as possible. 

You can say that the bubble is bursting slowly but this across the board pullback has also created opportunities in some of the high-quality SPACs. 

A lot of the SPAC buying opportunities have been created in the EV space. While last year saw valuations soar for many EV stocks, the recent rotation away from growth has rendered some of the EV SPACs undervalued. CLII (which is scheduled to take EVgo public) is one such stock, which has fallen enough from its peak for its valuation to start making sense. ChargePoint, which went public through a merger with SBE, is another attractive bet in the EV infrastructure space, especially given Biden’s EV push. TPGY, which is set to take EVBox public, is also an attractive bet on the growing EV population and charging needs in Europe. Arrival and GIK Stock (will take Lightning eMotors public) are good mainstream EV bets.

Clover Health is one of the SPACs that was rocked by the broader sell-off but also due to company-specific reasons. Hindenburg Research’s allegations tanked Clover Health stock and other Chamath Palihapitiya-backed SPACs also sold off on this news. Apart from the short-term considerations, Clover stock should be a long-term winner. 

Paysafe (PSFE) started trading on the NYSE on March 31 after merging with SPAC Foley Trasimene. Paysafe is well-positioned to take advantage of long-term prospects of the global payments industry. It has higher EBITDA margins than the market leader, PayPal.

STEM stock, which started trading on April 29 after the merger with Star Peak Energy, is also a potential buy based on its long-term positioning and an early mover advantage in the clean energy storage space. Its valuation also looks reasonable based on its growth forecasts.

Palihapitiya-backed IPOE SPAC, which is set to merge with SoFi, is one of these names. The stock is down 32 percent from its peak. While the stock still trades at a nearly 65 percent premium to the listing price, SoFi’s growth prospects and market-disrupting potential justifies its price.